The number one mistake homeowners make when they create their own living trust is forgetting to fund it.
I have helped over a thousand families with their living trusts and taught thousands of people how to do it themselves. This is the step people miss the most, and it is the step that decides whether the trust actually works when you pass away.
Here is what funding is, why it matters, and how to do it.
What Is Funding a Living Trust?
Funding is a fancy legal word for transferring.
When you fund your trust, you are transferring your assets out of your own name and into the name of your living trust. That includes your house and your financial accounts, like your checking, savings, and investment accounts.
Based on my experience, this is the most forgotten step in the entire process. It happens even when a lawyer prepares the trust. Most people forget to fund their financial accounts. Worse, a lot of people forget to fund their house, so when they pass away the house ends up in probate anyway.
Why Funding Your Trust Is So Important
Reason 1: It Is How You Avoid Probate
The whole point of setting up a trust is to keep your house and your money out of the probate court system when you pass away.
Probate usually takes a year, sometimes more than two. It costs thousands of dollars in most states. In California it costs tens of thousands, especially when you own a house. Your children have to wait through all of it before they receive their inheritance.
If you want your children to receive what you left them without going to court, funding is what makes that happen.
Reason 2: It Makes Sure Your Assets Go to the Right People
A trust can only control what is inside it.
Think of your trust like a safe with a lock. Whatever you put inside is protected from probate and protected from other people, and your written wishes are honored. Whatever you leave outside is not.
Here is what that means in practice. Say you have three children and you want one of them to receive your house. Your trust says exactly that. But if the house was never transferred into the trust, that instruction may not control what happens. The trust only governs the assets it actually holds.
So if you want your instructions to mean something, the assets have to be in the trust.
How to Fund Your Living Trust
There are two big assets most people need to transfer. Your real estate and your financial accounts.
How to Transfer Your House Into the Trust
This part is simple. You need a new deed that transfers the property from you as an individual to you as the trustee of your living trust.
The trustee is just the manager of the trust. While you are alive, you are the trustee. You still manage everything, including your house and your money.
There are three steps:
- Prepare the deed transferring the property from yourself as an individual to yourself as trustee of your trust.
- Sign the deed and have it notarized.
- Record the deed with the county where the property is located.
Once that is done, your trust controls who gets the house, and your children do not have to go to probate court to receive it.
How to Transfer Your Financial Accounts Into the Trust
After your trust is signed and complete, go to your bank and tell your banker you have a trust and you want to transfer your accounts into it.
You generally have two options.
Option 1: Retitle the account. The bank swaps your individual name for the trust name. In most cases the account stays the same. Same account number, same debit cards, same checks. Some banks, like Chase, will not let you do this. They require you to close the account and open a new trust account, which means new account numbers, new debit cards, and new checks.
Option 2: Name the trust as beneficiary. If retitling feels like too much work, you can keep the account in your own name and simply add your trust as the beneficiary. While you are alive, you still own the account. When you pass away, the account transfers to the trust.
A Pro Tip If You Name the Trust as Beneficiary
If you go with option two, there is one more step people get wrong.
Think about what happens if you become disabled. Say you develop dementia. You have not passed away, so the money still belongs to you, but you can no longer access your own accounts.
If the account is not in the trust, nobody can access it for you unless you have a power of attorney. That is a legal document that says a person you choose can access your bank accounts when you are disabled.
So make sure you have a power of attorney, and take it to the bank. The bank will likely have you fill out their own power of attorney forms as well. This step matters, because if the account is not in the trust and there is no power of attorney, nobody has the legal power to manage that money while you are alive and disabled.
Common Questions About Funding a Trust
Do my retirement accounts go into the trust?
Generally, no. It depends on your situation, but there are two tax reasons to be careful.
First, there are significantly more taxes involved when a trust owns your retirement account while you are alive. Second, when a trust is the beneficiary of a retirement account, the tax rate for trusts is higher. On top of that, a law called the SECURE Act changed the rules for how long your beneficiaries can keep the funds in the account before they are forced to withdraw them.
There is one situation worth weighing. If you have minor children, say a two-year-old or a four-year-old, you may not want them withdrawing everything the moment they turn 18. In that case, naming the trust as beneficiary may be worth considering. But you need to understand the tax implications first, so talk to a lawyer and a CPA before you do it.
The short answer is that most of the time you do not name the trust as the owner or the beneficiary of your retirement accounts.
What about life insurance?
It depends on your situation. For some of my clients, I recommend naming the trust as the beneficiary of the life insurance so their children do not receive a large lump sum and spend it all at once. With the trust as beneficiary, the money is managed by someone you trust, and the trust controls how it can be spent.
Do I lose control after funding my trust?
No. You are most likely creating a revocable living trust, which means you stay in control while you are alive. You do not need to worry about losing control of your assets.
Can I still refinance or sell my house after funding?
Yes. You have full control over your property while you are alive and healthy.
What about my out-of-state real estate?
You can fund that too. If you live in California and own a property in Nevada, you can transfer the Nevada property into your California trust. You do not need to create a separate trust for each state. Your trust can control your properties in any of the 50 states and DC.
Foreign property is different. If you own real estate in Mexico, China, the UK, or anywhere else outside the country, talk to an estate planning attorney in that country. Those countries have their own laws, and your U.S. trust generally will not control what happens to that property.
Why didn’t my lawyer help me fund my trust?
It depends on the service you paid for. If you spent very little, the lawyer probably gave you written instructions and left the rest to you, and most people never read them.
At my firm, I always help my clients fund their real estate. I also give them a checklist covering each of their financial accounts, their life insurance, and their retirement accounts, because every asset has its own way of being funded and you need a clear road map. Then we schedule a separate meeting to walk through the funding process together.
When you are interviewing a lawyer, ask whether they help you through funding. That question matters more than most people realize.
Is it hard to fund my trust?
No, as long as you know what to do. That is why I give my clients a checklist. Like anything else in life, once you know the steps, you just follow them.
What if I buy new assets later?
You can keep funding your trust for as long as you live. If you buy a house five years from now, or open a new bank account, transfer it into the trust then.
Here is a pro tip. Educate yourself about the funding process before you hire a lawyer and before you do it yourself, so you get it right the first time.
Ready to Fund Your Trust the Right Way?
Setting up a trust is not just about creating the document and signing it. The transfer process is just as important, and it is where most people fall short.
Take the free trust class. I break the whole process down into easy steps, including funding. You can also download a PDF funding checklist so you do not make any mistakes. Register at freetrustclass.com.
Book a free phone consultation. If you would rather have it handled for you, talk with our team about a plan built around your family. Call us at (408) 412-1913 or visit treeoflife.legal.
Subscribe on YouTube. I post new videos every week on living trusts and how to do it yourself.
My goal is to help you keep more money in the family and give you the peace of mind of knowing you did it right. Funding is what makes that possible, so do not skip it.
Disclaimer: I am not your lawyer, and this article is not legal advice. It is information only. Reading it does not create an attorney-client relationship. If you have a legal question, please talk to a lawyer.
