Your friend just purchased a house and has invited you over for lunch. You arrive at your friend’s house, navigate the long driveway until you reach a spot near the garage, and park. The home’s exterior and landscaping is, in your opinion, breathtaking. After climbing the front steps and ringing the doorbell your friend opens the door. You walk inside and ……..nothing. No furniture, no kitchen, and no bathrooms are to be found. The house is just a shell. As for your lunch – it looks like you and your friend will be going out to eat.
An unfunded Trust is an unfinished house. Trusts are designed to own, hold and pass property to beneficiaries outside of Probate. Trusts can also offer creditor and Medicaid protection. Trusts that have nothing inside of them will not function correctly. Assets that lie outside of a Trust may be subject to the Probate process and creditor intrusion. In other words, they are exposed to the elements and impacted by court costs and delays in implementation. This is not a desired result.
How does this happen? Creating a Trust and executing it is only the first step. Funding a Trust involves changing the ownership of an asset from an individual’s name to the name of the Trust. For Irrevocable Trusts, besides the Trust’s name there will be the Trust’s new Tax identification number attached to the asset instead of the individual’s Social Security Number. Banks and other financial institutions will ask for a copy of the Trust and the Tax Identification number to open a Trust account to hold the transferred assets. Real Estate transfers to a Trust are effectuated by a Deed Transfer from the original owner to the Trustee of the Trust which is then recorded by the County Clerk.
Unlike a Will which is created with a set of directions and left in an envelope until it is needed, Trusts require additional steps to become fully functional. If either the Trust Creator or a Trustee does not follow through with asset transfers then the end result can be an unfunded Trust. Sometimes unfunded Trusts are named as beneficiaries under an individual’s financial accounts and will control asset distribution according to Trust instructions. This may work for certain qualified retirement accounts, but other non-retirement assets remain exposed and will not be protected against creditors or Medicaid.
At the end of most Trusts there is a section called “Schedule A.” Schedule A is where Trustees list the current assets held by the Trust. It provides a running tally of what assets were transferred into the Trust and what assets have been removed from the Trust. Trustees should keep Schedule A up-to-date and coordinate with grantors to ensure that every asset is titled correctly. Trusts are not documents designed to remain in a folder. They have to be furnished and maintained. If you have questions concerning your existing Trust, please contact the professionals at Sloan and Feller today.