Although a living trust may serve a variety of objectives in your estate plan, there are two primary reasons for having one. The first is to insure that your property will continue to be managed for your benefit and the benefit of your loved ones if you become disabled or incapacitated. The second is to insure that your property will pass to your intended beneficiaries upon your death while avoiding the costs and delays of probate.
A revocable living trust is well suited to accomplishing those objectives. However, simply preparing the trust instrument is not enough. You must also take the necessary steps to insure that your property is in the trust at the proper time. Transferring your property to a living trust is a process that is often referred to as "funding a trust."
Every trust is created to accomplish certain objectives. Some of those objectives are intended to be accomplished during a grantor's lifetime, while others are intended to be accomplished only after a grantor's death. Whatever your objectives might be, it is clear that they can not be achieved with a revocable living trust unless the trust is properly funded. Funding a trust is critical to achieving the objectives of the trust.
When we say that funding a trust is critical to achieving the objectives of the trust, we do not mean to suggest that you must transfer all of your property to your revocable living trust at the very instant you sign the trust instrument. Most people are somewhat hesitant to transfer valuable properties to something they don't fully understand. Moreover, most people have worked hard to accumulate their property and they're not quite ready to stop living for the sake of an estate plan. So, there is a natural reluctance to transferring property to a revocable living trust. If done properly, however, the process of funding your living trust can be done painlessly and without any significant impact on your current lifestyle.
If you don't have to transfer property to your revocable living trust when you sign the trust instrument, then when do you have to fund it? The answer to that question depends upon your specific objectives in creating the trust. Although every trust is somewhat different, almost all trusts will have one or more of the following objectives:
1. To distribute property to intended beneficiaries. If your only objective is to have your property distributed to your intended beneficiaries via your living trust, then there is no need to fund you living trust during your lifetime. A properly executed pour-over will is sufficient to transfer property to your living trust upon your death. Your property will pass through probate first, but your objective will be accomplished because your property will be distributed to your intended beneficiaries via your living trust. Many estates are settled in this manner, with the living trust used as a will substitute because of its relative privacy and the ease in which the trust instrument can be amended or changed.
2. To avoid probate. If one of your objectives is to avoid probate, then a revocable living trust is an effective way to accomplish that objective as well. However, you only avoid probate on property that is held by the trust at the time of your death. If you own property in your own name when you die, a pour-over will transfers that property to your living trust, but the property goes through probate first. So, to avoid probate, you have to get your property into your living trust while you're still alive.
3. To insure management of property upon incapacity. If one of your objectives is to insure that your property is properly managed in the event of your incapacity, then a revocable living trust is also an effective way to accomplish that objective. As stated above, however, a living trust can only operate with respect to property that it holds at, or during, the time of your incapacity. If you become incapacitated and unable to handle your personal or financial affairs, and some or all of your property remains in your own name, then it may be necessary to have a guardianship or conservatorship established through the probate courts. The rules for establishing and maintaining a guardianship or conservatorship vary from state to state, but they are generally thought to be somewhat inflexible, costly, and unsatisfactory from the standpoint of family members. If your revocable living trust is intended to manage your property in the event of your incapacity, then you should take whatever steps are necessary to insure that your property gets into your living trust before you become incapacitated.