How Trust Funding Works: A Guide to Properly Funding Your Trust

What Is Trust Funding?

Trust funding is the act of re-titling assets in the name of the trust or designating the trust as the beneficiary of certain accounts. This ensures that the assets are legally controlled by the trust and distributed according to the terms you’ve set.

If a trust is not properly funded, those assets may not be covered by the trust’s terms and could be subject to probate, defeating one of the primary benefits of establishing the trust in the first place.

How to Fund Different Types of Assets

Funding a trust varies based on the type of asset. Below are common asset categories and how they are transferred into a trust:

1. Real Estate

Real estate is one of the most common assets transferred into a trust. This is done by preparing and recording a new deed that changes ownership from an individual’s name to the trust’s name.

Example: John and Jane Doe own a home titled in their joint names. To fund the trust, they execute a new deed transferring ownership from “John Doe and Jane Doe, as joint tenants” to “The Doe Family Trust, dated January 1, 2024.” This deed is then recorded with the county recorder’s office.

Special Considerations:

• Some states require specific language in the deed for homestead exemptions.

• Mortgaged property can usually be transferred into a trust without violating the due-on-sale clause, but it’s advisable to check with the lender.

• Property in another state should be transferred into the trust to avoid ancillary probate in that state.

2. Bank Accounts and Certificates of Deposit (CDs)

Bank accounts can be funded by changing the ownership to the trust or naming the trust as the payable-on-death (POD) beneficiary.

Example: Sarah has a checking and savings account at XYZ Bank. She visits the bank and retitles her accounts from “Sarah Johnson” to “Sarah Johnson, Trustee of the Johnson Family Trust.” Alternatively, she could name the trust as the POD beneficiary so that funds pass directly to the trust upon her death.

Special Considerations:

• Some banks may require new account numbers when retitling.

• If an account is used for everyday transactions, it might be preferable to keep it in the individual’s name with a POD designation to the trust.

3. Investment and Brokerage Accounts

Investment accounts, including stocks, bonds, and mutual funds, can be transferred into a trust by working with the financial institution to retitle them.

Example: Michael owns a brokerage account at ABC Investments. He completes the institution’s required paperwork to change the title of the account from “Michael Smith” to “Michael Smith, Trustee of the Smith Living Trust.”

Special Considerations:

• Retirement accounts (401(k)s, IRAs) should generally not be retitled in the trust’s name due to tax implications (more on this below).

• Some investment firms require medallion signature guarantees for transfers.

4. Life Insurance

Life insurance policies are typically funded by naming the trust as the primary or contingent beneficiary.

Example: David owns a life insurance policy with a $500,000 death benefit. Instead of naming an individual as the beneficiary, he updates the designation to “The David Family Trust” to ensure the proceeds are distributed according to the trust’s terms.

Special Considerations:

• Naming a trust as the beneficiary can provide creditor protection and structured payouts for heirs.

• If estate taxes are a concern, an Irrevocable Life Insurance Trust (ILIT) may be a better option.

5. Retirement Accounts (401(k), IRA, Pension)

Retirement accounts should not be retitled in the name of the trust, but the trust can be named as a beneficiary.

Example: Linda has a traditional IRA. Instead of naming her children directly as beneficiaries, she names the “Linda Family Trust” to control distributions after her passing.

Special Considerations:

• If a trust is named as the beneficiary, it must be carefully structured to qualify as a “see-through trust” to avoid immediate taxation.

• Naming a trust as the beneficiary can be useful for minor children, spendthrift heirs, or those needing creditor protection.

6. Business Interests (LLCs, Corporations, Partnerships)

For business interests, the transfer depends on the entity type. LLC interests can often be assigned to a trust, while corporations may require updated stock certificates.

Example: Tom owns a 50% interest in an LLC. He works with his business attorney to prepare an assignment of interest, transferring his membership interest from “Tom Williams” to “Tom Williams, Trustee of the Williams Trust.”

Special Considerations:

• Check operating agreements or bylaws to confirm transfer restrictions.

• Some business interests may require consent from other members or shareholders.

7. Personal Property

Personal property (jewelry, furniture, artwork, and collectibles) can be transferred into a trust by a general assignment or bill of sale.

Example: Elaine owns a valuable art collection. She signs a document stating, “I, Elaine Carter, transfer ownership of my art collection to The Carter Family Trust.”

Special Considerations:

• High-value items should be documented with appraisals.

• Some items, like firearms, may require additional legal compliance.

What Happens If Assets Are Not Properly Funded?

If assets are not transferred into the trust, they may be subject to probate. This can cause delays, additional costs, and a loss of the privacy benefits a trust provides.

Many estate plans include a “pour-over will”, which acts as a safety net by directing any assets not already in the trust to be transferred into it upon death. However, these assets may still need to go through probate before being moved into the trust.

Properly funding a trust is essential to ensuring that your estate plan works as intended. Each type of asset has its own requirements for transfer, and failing to complete these steps can leave your estate vulnerable to probate and unintended distributions.

To ensure your trust is fully funded, work with an experienced estate planning attorney who can guide you through the process and confirm that all assets are properly transferred.

If you have questions about trust funding or want to review your estate plan, Illinois Estate Law is here to help. Contact us today to ensure your trust is fully funded and your legacy is protected.