I have received a number of emails lately about when to fund a living trust. It's a question that seems to confuse a lot of people because there appears to be several right answers. And, there are - depending upon your reasons for establishing a living trust in the first place.
First, funding a living trust simply means transferring your property to your trust. How you transfer property is not the subject of this article. [See How to Fund a Living Trust.] Here, we're only concerned with when you should transfer your property.
The answer to that question really depends upon why you have a living trust in the first place. If, for example, your only objective is to protect your property after your death (i.e., because your intended beneficiaries are either too young to handle it on their own or because they're incapable of handing it), then there is no need to fund your living trust during your lifetime. All you really need to accomplish your objective is a pour-over will to transfer your property upon your death. You don't need to make any transfers to your living trust during your lifetime.
Of course, using a pour-over will to fund your living trust may accomplish your objective, but that means your property will pass through probate before it gets into your trust. Whether going through probate is good or bad is not the issue here. If you're concerned about probate, then that might change when you need to fund your trust. But, now, we're saying that if you're only objective is to protect your property following your death, then you don't need to fund your living trust during your lifetime - your pour-over will will take care of the funding when you die.
Historically, trusts created for this purpose were seldom funded during a trustor's lifetime. In fact, these living trusts were - and still are - referred to as "dry" trusts. And, that begs another quetion; i.e., if a living trust is intended to be "dry" during your lifetime, then why not just create a testamentary trust (i.e., a trust created under your will) instead of a living trust?
It's true that a testamentary trust will protect your property after your death just the same as a living trust. However, there are several reasons why a living trust is often preferred over a testamentary trust. First, a testamentary trust is created under a Last Will and Testament and, if you want to change the terms of your testamentary trust, you have to make a formal change to your Will.
Second, a living trust can include all the provisions needed for avoiding probate or having your assets managed by a third party in the event of incapacity, even though you may not be concerned about those things when you create your trust. In most cases, attorneys do not charge more for a living trust with these provisions than they do for a testamentary trust, so it's generally advisable to create a living trust with these provisions included, just in case they're needed later on. If they are needed later on, then all that needs to be done is to fund your living trust.
Third, living trusts offer the additional benefit of being totally private, whereas testamentary trusts are public because they're created under a will, which is a public document. While privacy may not be a compelling reason to go with a living trust, it is yet another reason that weighs in its favor.
You might be saying, "But, I thought living trusts were only used to avoid probate." Obviously, that's not true at all. In fact, the use of living trusts to avoid probate is only a recent phenomonon. The vast majority of living trusts are intended primarily to protect property after the owner's death and, therefore, do not need to be funded while the owner is alive. Consider, for a moment, all the young married couples out there who have minor children. They don't give a hoot about avoiding probate or having their assets managed by a third party if they become incapacitated. Death and incapacity just don't exist to 20-somethings or 30-somethings. They're only concerned about protecting their minor children in the event both of them die simultaneously in a car accident or some other type of tragedy. If that should happen, they want two things to happen: First, they want their minor children to be raised by the right people and, second, they want their property protected for the benefit of the children. With a pour-over will and a living trust, their problems are solved without any need to transfer property.
It should be clear, then, that the question of "when to fund your living trust" is mostly dictated by your objectives in having one. As discussed in this article, it is clear that a living trust does not have to be funded at all during your lifetime if your only objective is to protect your property after your death, provided you have a pour-over will in place to handle the funding for you. On the other hand, if one of your objectives is to avoid probate or to have your property managed upon incapacity, then you need to fund your living trust before those events occur. That does not mean, however, that you must fund your living trust at the moment your trust is created. There's some flexibility here as well. We'll discuss these issues in part II of this article.
About Michael Pancheri, Trust & Estate Attorney, Canton, Connecticut