Executing a trust document is the first step in creating a trust. A trust only becomes effective when it is funded with the settlor’s assets. If you are establishing a trust, it is important to transfer property that you own into the trust. Failing to make that property transfer can leave your property subject to probate upon your death.
An experienced, knowledgeable trust fund attorney from Business Estate & Tax Attorneys, P.C., can help you structure a trust tailored to your specific needs and disposition preferences, including ensuring that the trust is properly funded. Schedule a free initial consultation today by calling us at (925)-271-4451 or by reaching out to us online at the contact page on our website.
How Do You Fund a Trust in California?
You may choose to fund a trust with assets during your lifetime or designate a trust as a beneficiary in your will, meaning that it will be funded upon your death.
Funding a trust in California requires transferring ownership of property to the trust. The exact process of funding a trust depends on the type of property being transferred.
- Real Estate – Transferring real estate to a trust requires executing a deed (typically a trust transfer deed or quitclaim deed) to the property. To transfer property by deed, the deed must be signed by the transferring owner and then notarized. The deed is then recorded with the register of deeds where the property is located.
If the property is encumbered by a mortgage or is located in a homeowners’ association, you may need the permission of the lender or HOA to effect the transfer. In addition, you may wish to ensure that you properly structure the property to avoid transfer taxes and a revaluation for tax assessment purposes.
- Vehicles, Boats, and Other Titled Property – Ownership of cars, trucks, motorcycles, RVs, ATVs, boats and airplanes is typically established through possession of a title to the property. Transferring ownership of this type of property to a trust requires transferring title to the trust via the state motor vehicle agency or another state agency. As with real estate, you may wish to structure the transfer in such a way as to avoid transfer taxes. If the property is encumbered by a lien, you may also need the permission of the lender to transfer the property.
- Personal Property – Untitled personal property such as furniture, jewelry, art or collectibles can be transferred with a simple document that shows the assignment of ownership. The document is signed and dated by the owner of the property. The document should also accurately describe the identity of the property being transferred.
- Bank Accounts – Ownership of bank or brokerage accounts can be transferred according to the process set forth by your bank or brokerage firm. Some banks or brokerage firms may require you to close your current account and set up a new account. Check to see whether doing so may require you to pay additional fees or taxes.
- Business Interests – Business interests, such as shares in a closely held corporation or partnership, can be transferred according to the process set forth in the business’s bylaws or the operating/partnership agreement.
What Assets Cannot Be Transferred to a Trust?
Certain kinds of assets cannot be legally transferred to a trust. Other types of assets should not be transferred to a trust due to the fees, penalties or taxes that might be imposed as a result of the transfer. Assets that cannot or should not be transferred to a trust include:
- Qualified retirement accounts such as 401(k)s, IRAs, and qualified annuities – Transferring these accounts can be treated as a withdrawal of funds and subject you to income taxes. Instead, your trust should merely be designated as a beneficiary of these accounts.
- Health savings accounts – These accounts cannot legally be retitled in the name of your trust. However, you may be entitled to name your trust as a secondary beneficiary.
- Uniform Transfers/Gifts to Minor Accounts – In these types of transfers, the recipient child is legally considered the sole owner of the account.
Other transfers you should exercise care in making include:
- Life insurance policies – The transfer can cause you to lose creditor protection.
- Titled vehicles such as cars, motorcycles, boats, and airplanes – The transfer may be deemed a sale resulting in taxes.
What Happens to Assets Not in a Trust?
Assets not transferred to a trust before or at the time of your death are considered part of your estate. Those assets must then be distributed to the beneficiaries in your will or your legal heirs as part of the probate process.
Depending on the size and complexity of your estate and the assets you leave behind, probate can turn into a long and expensive legal process. Probate may also result in the imposition of federal and/or state inheritance or estate taxes. Transferring your assets to a properly structured trust can help you and your family avoid these difficulties.
What Happens If a Trust Is Left Unfunded?
If you leave a trust unfunded at your death, then your trust is essentially useless, from a legal perspective. A trust can only control and manage assets transferred and titled in the name of the trust. You can ensure that your trust is funded at your death by establishing a pour-over provision in your will. That provision in the will leaves your designated estate assets to your trust. Those assets will also need to go through the probate process, which nullifies one of the primary advantages of a trust over a will.
Fortunately, in California, executing a trust document that assigns all of the settlor’s real and personal property to the trust will save the trust from being unfunded. A trustee can also file a petition with the court upon the settlor’s death to transfer ownership of the property to the trust. However, using this method, or even listing specific assets on a schedule attached to the trust document, should not be relied upon as a substitute for properly transferring ownership interests and retitling property in the name of the trust.
Talk to an Orinda Trust Lawyer Now
If you or a loved one are considering establishing a trust, schedule a free consultation with an experienced Orinda trust attorney from Business Estate & Tax Attorneys, P.C. We would be happy to describe the general process of funding a trust in California, and we can discuss how we can help you set up a trust for yourself and your family. Call us today or contact us online.