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What Does Funding A Trust Actually Mean?


Funding a trust means to place assets into a trust, by changing the title on the assets. This makes the trust the owner of those assets.

Who Is Ultimately Responsible For Funding A Trust?

When a trust is initially created, it is the settlors, the persons who have created the trust, who have the initial obligation to fund the trust. The reason for that is they are the ones who personally own the assets, and so they are the ones who have the ability to make that transfer.

What Happens If Someone Does Not Fund A Trust?

If someone does not fund a trust, then the trust simply has no effect. When you have a trust, you think of that as similar to a corporation. In the same way that a corporation’s bylaws don’t affect assets owned by others, a trust does not affect assets that are not owned by the trust. In order for a trust to have any effect whatsoever, it must own assets.

What Type Of Assets Can You Put Into A Trust?

You can put almost any type of asset in a trust. There are some assets that we would prefer not putting in trust, because they could have adverse tax consequences if we do. However, there really are no assets that cannot be transferred into a trust, unless the assets themselves restrict transfer. This would be true of assets like interest in a closely held business. Sometimes businesses have shareholder agreements that prohibit the transfer of those shares from the individual owner to someone else. When this occurs, what we typically do is get consent from the other shareholders to transfer those assets from the trust. Those restrictions are not really meant to keep people from funding a trust. What they are really meant to do is to keep people from bringing in other shareholders without the consent of the current shareholders.

What Are Some Of The Assets That You Should Not Put Into A Trust As Well As The Ones You Cannot Put In a Trust?

There are a couple of assets we do not generally put into a trust. The most important of these are tax deferred assets such as IRAs, 401(k)s, and other types of retirement plans or tax deferred annuities. The reason for this is the tax deferred plans lose their tax advantages once they are transferred. If the owner of tax deferred plans does transfer them into the trust, and the trust becomes the new owner, they become immediately taxable in that tax year, as if outright distribution was made to the planned participant. This could be a very bad outcome, so we don’t recommend transferring tax deferred assets to a trust.

What About My IRAs Or Tax Deferred Plans?

We don’t recommend transferring IRAs or other tax deferred plans. The good news is that if a person tried to transfer their tax deferred plan into a trust, the custodian of that plan would probably not allow them to do it. They would make it very difficult for them to do that, because they are aware of the tax consequences.

Can I Add Assets At Any Time To The Trust? Is That Process Different Than Setting Up A Trust?

You can add assets to a trust. Throughout the lifetime of the trust, the settlors will put new assets in and take some assets out. For instance, if they were to move from their current home and purchase a new home. The sale of the home takes the assets out of the trust, simply because the trust is no longer the owner of that asset. When they purchase the new home, they need to be sure to put the title of the new home in the name of the trust. On the guaranteed portion of the deed, they list themselves as trustees of the trust as the owner, instead of just having their names. This is also true if they were to open bank accounts or brokerage accounts and other financial transactions. All of these actions should be done in the name of the trust, and that’s how assets are transferred into or out of the trust.

For more information on Funding A Trust In California, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (626) 385-6303 today.

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