So you’ve established a Trust.
You’ve named the Beneficiaries and the Trustee.
You’ve also signed all the paperwork.
Now that you’ve checked all the boxes, where do you go from here?
What is a Trust?
Trusts are a form of fiduciary relationship where one party (the Grantor; see below) gives a second party (the Trustee; see below) the right to hold titles to property and administer financial accounts for a third party’s (the Beneficiary; see below) benefit.
Who’s involved in a Trust?
Three main parties are involved in establishing a Trust:
• Grantor. The party who establishes the Trust.
• Trustee. The party who oversees and manages the Trust.
• Beneficiaries. Those who benefit from the Trust.
Types of Trusts
All Trusts must be funded, but different Trusts necessitate different funding methods. Below are common four types of Trusts:
Also known as an inter vivos Trust, Living Trusts in Colorado allow the Grantor to transfer ownership of personal assets into a Trust during their life. Living Trusts work best for Grantors who intend to use the assets that fund the Trust while they’re still alive.
There are two types of Living Trust:
- Revocable Trusts, which may be amended or cancelled at any time.
- Irrevocable Trusts, which cannot be modified or terminated without approval from the beneficiary parties named in the Trust.
Land Trusts are a type of Living Trust that assumes ownership or authority over a piece of property at the property owner’s request. They allow for property management while the owner is still alive.
As a gift of cash or other property, charitable Trusts allow you to give back to causes you care about while reducing estate taxes and capital gains. This type of Trust works best for Grantors with large estates and an interest in philanthropy.
There are two types of charitable Trust:
- Charitable Remainder Trust (CRT), which provides an incremental cash or property gift for your beneficiaries over a years-long term, while your preferred named charity receives the remaining Trust assets at the end of the Trust term. CRTs are irrevocable.
- Charitable Lead Trust (CLT), which provides an incremental cash or property gift to a named charity over a years-long term. CLTs are also irrevocable.
Special Needs Trusts
Special Needs Trusts are legal arrangements that provide funding to beneficiaries with disabilities. This kind of Trust may be revocable or irrevocable. It also requires awareness of social security program qualification criteria.
Why do Trusts need to be funded?
After opening a Trust, it’s common for grantors to dust off their hands and save funding the Trust for a later time.
This is a mistake.
Trusts without funding are Trusts with no value or purpose. And Trusts without value or purpose leave estate owners vulnerable to surprise estate taxes, probate, and collections agencies. More on the consequences for unfunded Trusts below.
What Happens if a Trust isn’t Funded?
Living Trust benefits encompass more than just money. They protect family members from probate proceedings, all while providing privacy and a clear roadmap for navigating a deceased Grantor’s estate.
Living Trusts, however, require funds before they can provide the above benefits, which begs the question – what happens if a Trust is unfunded?
Since Trustees can only access assets assigned or transferred to the Trust, freestanding assets won’t pass to designated beneficiaries after the Grantor dies. And while a pour-over will, or automatic transfer of freestanding assets to a Trust after the Grantor dies, provides some protection against probate proceedings, both unfunded Trusts and pour-over wills are subject to probate. A worst-case scenario for unfunded Trusts could involve assets being distributed to creditors instead of beneficiaries.
When does a Trust need to be funded?
After a settlor signs an agreement to create a Trust, they must fund the Trust with assets. Timelines for funding a Trust, however, may vary depending on the size of your estate and the nature of your assets. Consult with a legal professional for personalized recommendations.
What is the Process of Funding a Trust?
Now that you understand the consequences of leaving a Trust unfunded, it’s time to dive into the Trust-funding process.
Funding a Trust requires several necessary steps:
Communicate with Your Trustee
Before creating deeds or transferring titles and bank accounts, it’s important to discuss funding your Trust with your Trustee. Discuss why you’ve selected them to be your Trustee, provide details on what their duties will entail, and always grant them the space to decline taking on the duties a Trust requires. The more complicated the Trust, the more thorough of a roadmap you must provide.
Below are starter questions to consider asking a potential Trustee:
- Real estate. What does the Trustee need to know about mortgages? Do they have the means or feel comfortable taking over a mortgage after your death?
- Taxes. What taxes does your Trustee need to be aware of? Will your Trustee be subject to any transfer taxes?
- Insurance. Will your home or other assets remain covered by your insurance when transferred to your Trust?
- Concerns. Does the Trustee have any doubts about their ability to administer a Trust?
How are Trust Assets Distributed?
Before diving into the unique processes behind transferring common assets into a Trust, it’s important to understand that there are two main varieties of asset distribution:
- In-Kind, which includes titled assets beneficiaries have agreed to take as part of their inheritance. Examples of titled assets include real estate, cars, and boats.
- Cash, which includes funds from all liquidated assets. Cash distributions can be made via cash, cashier’s check, wire transfer, or a check written from the Trust account.
Common Assets and How to Transfer Them to a Trust
The variety of eligible assets one may transfer into a Trust is virtually endless. Below are five common assets:
Real Estate and Titled Personal Property
To ensure real estate assets carry over to the Trustee after your death, a new deed is required. On the new deed, list your name as the current owner and the Trustee’s name as the future owner. Once the new deed is completed, check in with the state of Colorado and your local county to see what additional documents they require to transfer real estate and personal property to a Trust. For the final, most important step, file the new deed and completed applicable paperwork with your County Recorder. This step ensures that your new deed is legal and will replace your existing old deed.
Note that rules and process requirements for funding a Trust with real estate and titled personal property may vary by locale.
Untitled Personal Property
Transfer untitled personal property, such as furniture, jewelry, and common household items, with a signed and dated assignment of ownership document.
Contact your bank to learn how to title savings, checking, Certificate of Deposit accounts to your Trust, as processes may vary by bank. This process typically involves closing the account before opening a new account in your Trust’s name.
Business interests, such as partnerships, company shares, and LLCs, can be retitled in the Trust’s name. Specific transfer restrictions and procedures vary on a case-by-case basis.
Life Insurance Beneficiaries
Grantors with one or more life insurance policies can transfer them by changing the ownership from their name to their insurance Trust’s name.
What items may not be transferred to a Trust?
Select assets are not eligible for transfer into a Trust. They include:
- Retirement Accounts, such as IRAs, 401(k)s, and 403(b)s, cannot be transferred or retitled. Doing so could subject beneficiaries to income tax and withdrawal of funds penalties.
- Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs).
A work-around for the above items involves changing the beneficiary designation. Speak with a legal representative for more details.
When should I rewrite or edit a Trust?
While there are no limits to when you can rewrite or edit a Living Trust, it’s best to review and amend a Living Trust during or after significant life changes.
Major life changes include:
- Birth or child adoption
- Beneficiary death
- Change in beneficiary relationships or life circumstances
- Acquiring new property
- Moving to a place where inheritance laws differ
Why should I review or edit a Living Trust after a significant life change?
Living Trusts are like the lives they represent. They evolve and change, sometimes multiple times throughout their creator’s life.
Reevaluating a Trust following significant life events helps you see whether or not the Trust still applies to your new situation. For example, the birth of new children requires adding new beneficiaries to a Trust and outlining conditions where they’ll receive funds, while a divorce necessitates removing the old spouse from the Trust.