If your estate plan documents make use of a revocable trust, also known as a "living trust," you need to ensure that the trust is fully "funded." When properly structured, revocable trusts can provide significant benefits, including the ability to avoid probate of the assets they hold and facilitate management of your assets in the event you become incapacitated. However, these benefits are not automatic. You must fund the trust, which means transferring title of assets to it or designating it as the beneficiary of retirement accounts or insurance policies. However, with the passing of the SECURE Act in 2019, the rules surrounding distributions of retirement accounts to trusts have become more complex.
Avoid probate and more
For larger estates, a revocable trust is generally the most effective tool for avoiding probate. It involves some setup costs, but allows you to manage the disposition of all of your wealth in one document while retaining control and reserving the right to modify your plan. As the "grantor," you can instruct the trustee how and when to distribute the trust's assets and you usually can revoke the trust at any time.
To avoid probate, it is critical to transfer title to virtually all of your assets - now and in the future - to the trust. Assets outside the trust at your death will be subject to probate unless you have otherwise titled them in such a way as to avoid it (or, in the case of life insurance, annuities and retirement plans, you have properly designated beneficiaries).
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What happens if a revocable trust is not funded? Say, for example, you acquire new assets but fail to transfer title to the trust or name it as beneficiary. Not only will those assets be subject to probate, but they will be beyond the trust's control in the event that you become ill or disabled and unable to manage your own financial affairs. To avoid this result, it is a good idea to take inventory of your assets periodically and ensure that your trust is fully funded.
Another important reason to fund your trust is the ability to maximize Federal Deposit Insurance Corporation (FDIC) insurance coverage. Generally, individuals enjoy FDIC insurance protection on bank deposits up to $250,000. But with a properly structured revocable trust account, it is possible to increase that protection to as much as $250,000 per beneficiary, up to five beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary.
For instance, if your revocable trust names five beneficiaries, a bank account in the trust's name is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million ($2.5 million for jointly owned accounts). For informal revocable trust accounts, the bank's records, though not the account name, must include all beneficiaries who are to be covered. FDIC insurance is provided on a per institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks.
Keep in mind that FDIC rules regarding revocable trust accounts are complex, especially when a trust has more than five beneficiaries. Be sure to consult with your financial advisor to maximize insurance coverage of your bank deposits.
Achieve several goals
Avoiding probate is just one part of estate planning. Each financial situation is unique, so consult with your legal, tax or financial advisor. Your ORBA advisor can help you develop a strategy that uses a revocable trust and other tools to minimize probate, reduce taxes and achieve other goals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.