Publications
The Importance of Trust Funding
by Louise L. Labadie and Richard R. Zmijewski
August 2010
Establishing a trust is an important part of estate and financial planning. A trust enables individuals and families to avoid unnecessary taxation of inheritances and to avoid opening a probate matter with the local court. However, establishing a trust only gets you halfway there. A trust must also be funded and trust assets must be properly allocated.
In order for your trust and overall estate plan to work as designed, the trust must be properly funded. Trust funding is the process of transferring assets from your individual name to your trust during your lifetime. Although most estate plans have built in provisions to move assets into a person's trust after death, post death funding can only be accomplished through the probate process. In other words, if you don't fund your trust during your lifetime, your estate plan goals may not be fully realized.
Although not an exhaustive list, residential and vacation property, automobiles, boats, stocks, bonds, 401(k) accounts, pensions, retirement accounts, money market accounts, and life insurance are all assets that can be used to fund your trust.
Since every situation is different, trust funding must be tailored to the individual circumstances and requires a carefully, thought-out strategy. Even after a trust has initially been funded, certain life changes such as divorce, inheritance, and the accumulation of wealth require a periodic reexamination of current funding. .
Once all of your assets have been placed into your trust, the total amount of assets should be reviewed with an eye toward minimizing taxes. Currently the federal estate tax is scheduled to return next year with an exemption amount of one million dollars. Because the exemption amount was $3.5 million in 2009, the million dollar exemption is sure to subject many more estates to the federal estate tax.
Married couples can help reduce their tax exposure by making sure their estate plans are balanced - that is, that their assets are properly allocated between their two trusts. For the following example, assume the exemption amount returns to $1 million with a tax rate of 55%. Also assume that spouse A's trust is funded with $1.3 million in assets while spouse B's trust has $700,000 in assets. Also assume that the marital deduction from estate tax does not apply because each spouse is leaving his or her trust assets to beneficiaries that do not include the other spouse.
When spouse A dies, $300,000 (the amount exceeding the estate tax exemption) will be taxed and the estate will pay $165,000 in taxes. If spouse B dies there will be no estate tax but $300,000 of the available exemption will be left unused. If our married couple had balanced their trust assets by moving $300,000 from spouse A's trust to spouse B's trust, then neither trust would be taxed. Moreover, the transfer from spouse A to spouse B will not be taxed because transfers between spouses generally have no tax consequences. What could your beneficiaries or designated charity do with $165,000?
In another example, a trust may exceed the applicable exemption of one million with no opportunity to balance the assets with a spouse. In these situations, transferring assets outside of the trust can help your estate avoid paying unnecessary estate tax. This can be accomplished through transferring assets to an irrevocable life insurance trust or through a concerted annual gifting plan.
By helping you to achieve your estate planning objectives and allowing the future administration of your trust to proceed more smoothly, proper funding of a trust is an investment in itself. For trusts with amounts exceeding the estate tax exemption, allocation of assets between spouses, moving assets to separate trusts, or gifting assets, can minimize estate taxes.
Please contact Louise Labadie or Richard Zmijewski at (313) 496-1200 to inquire how we can help you fund your trust accurately and completely.
