The Forgotten Step to a Successful Estate Plan

Most estate plans now involve revocable trusts of every kind and description with the goal to avoid probate in the estate plan. Although trusts have many other benefits, probate avoidance is the touchstone of revocable trusts. When creating a trust, attorneys and their clients concentrate on the details of the estate plan and then the documents. But what about how the trust will be funded?

While meeting with a client to make some revisions in his trust created several years ago, I casually asking about the funding of the trust. To my horror, the client told me, “Oh, I haven’t done anything yet.”

As part of trust creation, we discuss funding at our client meetings and provide a detailed memo of instructions for funding. Most clients want to do their own funding and plan on contacting their banks and financial institutions at some unspecified time after the documents are signed. This can lead to an unfunded trust.

This was brought home to me recently. While meeting with a client to make some revisions in his trust created several years ago, I casually asking about the funding of the trust. To my horror, the client told me, “Oh, I haven’t done anything yet.” As calmly as I could, I emphasized the necessity of funding the trust. I went through all of his assets and gave him specific instructions. I asked that he confirm the transfers into the trust and complete a list of assets to attach to the trust.

I think he got the message, but it just reinforced the need for me to place greater emphasis on this critical aspect of estate planning.

Don’t Forget to Fund the Trust

The funding process should start even before the initial meeting. The client should complete a questionnaire or similar document listing any assets and how the assets are titled. Funding should be a part of the first conference and then followed up with written and verbal instructions at the signing conference.

Generally, the client has to accomplish the actual transfers with the banks and financial institutions with the attorney providing guidance and reminders as needed. There are some funding transfers that the attorney can and should implement.

Beneficiary Deed. We usually recommend using a beneficiary deed to transfer real estate to the trust at the death of the grantor of the trust (or death of the survivor if a joint or spousal trust). This is a very efficient and user-friendly method of transfer. Use of a beneficiary deed allows the client to remain in title of his real estate and to sell or refinance without involving the trust.
Direct Transfer or Nonprobate Transfer. Another transfer we can do for the client is the assignment of his interest in a business entity such as a corporation or limited liability company. This can be done by a direct transfer to the trust or by a nonprobate transfer in which the property does not pass to the trust until the death of the owner (like the beneficiary deed). Missouri’s nonprobate transfer law is broad and covers a wide variety of property. See Section 461.001 and following provisions. These transfers should be done carefully and by an attorney.

And Don’t Forget Retirement Plans

Another critical subject of funding involves the client’s IRA(s), 401k plan(s), and other retirement plans. These assets are already in a trust and are distributed under the terms of such trust usually through a beneficiary designation. Such retirement plans are complex and involve significant tax considerations when plan funds are distributed. In many cases these plans comprise the bulk of the client’s assets.

We need to identify these plans and give the client guidance on how the beneficiary designation needs to be completed or whether existing designations need to be revised. In many cases it is advantageous to transfer the assets directly to an individual beneficiary, such as a spouse or child, to stretch out the distributions which are taxable. In other cases, it may be necessary to distribute retirement proceeds to the plan owner’s trust. This can be the case with minor beneficiaries or special needs beneficiaries. With plan beneficiaries, the client is required to make the change, but we can request the beneficiary designation form from the plan and advise the client how to complete it.

This is a brief and general summary of funding methods and issues. Each estate plan is unique and may involve special and complex funding issues not included in this summary. The key here is to emphasize the need to devote significant time to the funding aspect of trust estate planning and to develop methods to ensure that the client implements the funding necessary for the success of the estate plan.

Posted by Attorney Michael J. McKitrick. With over 40 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, estate planning, commercial real estate matters, and regulatory and practice management guidance for health care professionals.