Aligning Your Assets: Why Funding Your Living Trust is Essential
A living trust is one of the most powerful estate planning tools available, offering a seamless transition of assets while avoiding probate. However, simply creating a trust is not enough. To ensure it functions as intended, you must align your assets with the trust. Without proper alignment, the trust’s benefits may be lost, and your estate could face unnecessary legal complications.
What Does Aligning Assets Mean?
Aligning assets means formally transferring ownership of your property and financial accounts into the trust’s name. Where transfer of ownership is not possible or advisable, aligning assets means naming the correct beneficiaries of the asset. This ensures that, upon your incapacity or passing, your trustee can manage and distribute your estate according to your wishes without court involvement.
Think of your trust as a safe. If you don’t place your valuables inside, they are still at risk. Aligning assets with your trust is like ensuring that everything important is securely stored where it belongs.
Benefits of Aligning Your Assets
- Avoids Probate – Probate is a court-supervised process that can be time-consuming and costly. Assets aligned with your trust bypass probate, providing a smoother transition for your heirs.
- Ensures Control in Incapacity – If you become incapacitated, assets in your trust can be managed by your chosen trustee without court intervention.
- Preserves Privacy – Unlike wills, which become public record during probate, a trust remains private.
- Facilitates Efficient Distribution – Properly aligned assets are distributed directly according to your instructions, preventing delays and disputes.
- Protects Beneficiaries – If you have minor children or loved ones with special needs, aligning assets with your trust ensures they are taken care of appropriately.
How to Align Different Types of Assets
Real Estate
To align real estate with your trust, you must execute a new deed transferring ownership from your name to the trust. This must be properly recorded in the county where the property is located.
Example: John and Mary Smith own a home. If they transfer it into their trust, their chosen trustee can manage or sell it without going through probate.
Bank Accounts and Investments
Many banks allow you to retitle accounts in the name of your trust. Where that is not possible, a second-best choice is to list the trust as a beneficiary through a payable-on-death (POD) designation. Where the trust is a beneficiary but not an owner your trustee may have more difficulty managing the assets if you are incapacitated.
Example: If Sarah has a savings account and transfers ownership to her trust, her successor trustee can access the funds to pay bills or distribute them to beneficiaries.
Retirement Accounts
While IRAs and 401(k)s cannot be directly placed in a trust during your lifetime, you can name the trust as a beneficiary to ensure control over how funds are distributed. There are special tax considerations in naming a trust as a beneficiary so this should be done with expert assistance.
Example: If Tom wants his minor children to receive his retirement funds in a structured manner, naming his trust as a beneficiary allows the trustee to manage distributions according to his wishes.
Life Insurance
Changing the beneficiary designation of your life insurance policy to your trust ensures the proceeds are distributed in alignment with your estate plan.
Example: Instead of listing individual heirs as beneficiaries, Jane names her trust. This ensures funds are managed appropriately rather than given in a lump sum to young or financially inexperienced heirs.
Business Interests
If you own a business, your ownership shares should be reassigned to your trust to ensure continuity in management and avoid court intervention.
Example: Mark owns an LLC. By transferring ownership to his trust, his business can continue operating without disruption upon his passing.
Consequences of Not Aligning Assets
If assets are not properly aligned, they may remain subject to probate, defeating the trust’s primary purpose. Additionally, assets not in the trust may not be governed by the trust’s terms, leading to unintended distributions.
Example: Lisa created a trust but forgot to transfer her bank accounts. When she passed away, those accounts went through probate, causing delays and additional costs for her family.
Conclusion
A living trust is only effective if your assets are properly aligned with it. Without this crucial step, your estate may still face probate and legal challenges. Taking the time to align your assets ensures that your wishes are honored, your beneficiaries are protected, and your estate is efficiently managed. If you are unsure whether your assets are correctly aligned, our law firm can assist in reviewing your estate plan, including asset alignment, and help you make any necessary updates.
