What Happens if You Don’t Properly Fund Your Revocable Trust

Creating a revocable living trust is a key component of many estate plans. It offers benefits such as avoiding probate, maintaining privacy, and allowing for smooth management of assets in case of incapacity or death. However, simply setting up a trust isn’t enough. If you do not properly fund your trust—meaning, if you don’t transfer ownership of your assets into the trust—the trust cannot effectively accomplish its intended purposes.

1. What Does It Mean to "Fund" a Revocable Trust?

Funding a revocable trust involves transferring ownership of your assets from your name into the name of the trust. This is essential because while the trust document itself outlines how assets should be managed or distributed, it can only govern assets that are legally owned by the trust. If you do not transfer ownership of your assets into the trust, those assets may not be subject to the trust’s terms.

To fund your trust, you need to:

• Retitle assets, such as real estate, bank accounts, and investment accounts, in the name of the trust.

• Designate the trust as the beneficiary of life insurance policies (in certain situations), or other accounts, if appropriate.

• Transfer tangible personal property (such as vehicles, jewelry, and valuable collectibles) into the trust, often through a general assignment document.

2. The Consequences of Not Funding Your Trust

If you fail to properly fund your trust, the benefits of having a revocable living trust are significantly reduced. Here are the major consequences of not funding your trust:

a. Your Estate May Still Go Through Probate One of the primary reasons people create revocable living trusts is to avoid probate—the court-supervised process of distributing assets upon death. Assets that are properly funded into a trust can be distributed without going through probate. However, if you don’t transfer your assets into the trust, those assets will likely still have to go through probate. For example, if you own a home but fail to transfer it into your trust, the home may need to go through probate, subjecting your beneficiaries to delays, costs, and public scrutiny.

b. Loss of Privacy Assets distributed through probate become part of the public record, meaning that anyone can view the details of your estate. A funded trust keeps this information private, shielding your assets and beneficiaries from public disclosure. Without proper funding, the probate process makes the details of your estate a matter of public record.

c. Inability to Manage Assets During Incapacity A key benefit of a revocable trust is the ability for a successor trustee to step in and manage your assets if you become incapacitated. If your assets aren’t properly transferred to the trust, the successor trustee may have no authority over them. This could force your family to go through a court-appointed conservatorship to manage your assets, which is costly, time-consuming, and often emotionally difficult.

d. Increased Costs for Your Heirs If your assets must go through probate because they were not properly transferred to your trust, your heirs may face additional costs, including court fees, attorney fees, and administrative expenses. These costs can quickly add up, reducing the overall value of your estate that will eventually go to your beneficiaries.

e. Potential for Conflict Among Heirs A properly funded trust helps streamline the process of distributing assets according to your wishes. If your assets aren’t in the trust, it can create confusion and lead to conflicts among heirs. For example, if some assets are in the trust and others aren’t, it can lead to disputes about what should be included in the distribution or how assets should be divided. This is especially true in blended families or situations where heirs may have conflicting interests.

3. What Assets Should Be Funded Into Your Trust?

Almost any asset you own can be transferred into a revocable living trust. Key examples include:

• Real estate: Transfer your home and any investment properties into the trust to avoid probate and simplify distribution.

• Bank accounts: Checking, savings, and money market accounts can be retitled in the name of your trust.

• Investment accounts: Stocks, bonds, mutual funds, and brokerage accounts can be transferred into the trust. However, retirement accounts such as IRAs and 401(k)s generally should not be retitled in the name of the trust, but you may choose to name the trust as a beneficiary.

• Life insurance policies: You can designate your trust as the beneficiary of life insurance policies to ensure that the proceeds are distributed according to your wishes.

• Tangible personal property: Items such as cars, artwork, jewelry, and other valuables should be transferred into the trust through a general assignment document or by retitling, if applicable.

Some assets, like retirement accounts or annuities, may have specific tax implications if transferred directly into the trust. It is important to work with an estate planning attorney to determine the best strategy for these types of assets.

4. How to Ensure Your Trust is Properly Funded

Properly funding your trust is crucial to making it work as intended. Here are steps you can take to ensure your trust is fully funded:

• Inventory Your Assets: Begin by making a comprehensive list of all your assets. This will help you identify which assets need to be transferred into the trust.

• Retitle Assets: Work with your attorney, bank, or financial institution to ensure that assets are correctly retitled in the name of your trust.

• Update Beneficiary Designations: Review and update the beneficiary designations on your life insurance policies, retirement accounts, and other accounts.

• Regularly Review Your Trust: Over time, you may acquire new assets or sell existing ones. It’s important to regularly review your trust to ensure that any new assets are properly transferred into the trust and that your estate plan remains up-to-date.

5. What Happens if You Miss an Asset?

If you fail to transfer certain assets into your trust during your lifetime, a "pour-over will" can serve as a backup. A pour-over will directs that any assets not already in the trust at the time of your death be transferred (or "poured over") into the trust. However, assets passing through a pour-over will must still go through probate, so it is best to fully fund your trust during your lifetime to avoid probate entirely.

A revocable living trust can provide significant benefits, from avoiding probate to protecting your privacy. But those benefits are only realized if you properly fund the trust. Failing to transfer assets into your trust can result in your estate going through probate, increased costs for your heirs, and potential conflict among beneficiaries. To ensure your trust works as intended, it’s essential to fund it correctly and review it regularly as part of your overall estate plan.

If you have questions about funding your revocable living trust or need assistance in ensuring your estate plan is fully in place, consult with an experienced estate planning attorney. Taking the time now to properly fund your trust can save your family time, money, and stress in the future.

Understanding the Role of a Will and Its Limitations in California Estate Planning

A will, also known as a last will and testament, is a fundamental document in estate planning. It allows you to specify how your assets should be distributed after your death, name guardians for your minor children, and appoint an executor to carry out your wishes. However, while a will is an essential component of an estate plan, it has limitations that make it insufficient on its own for many California residents. Here’s a closer look at what a will does and why it may be limiting.

What a Will Does

1. Asset Distribution A will outlines how you want your assets, such as property, money, and personal belongings, to be distributed among your heirs after you die. This ensures that your wishes are followed and can prevent disputes among family members.

2. Guardian Appointment If you have minor children, a will allows you to designate a guardian to care for them if both parents pass away. This is crucial for ensuring your children are raised by someone you trust.

3. Executor Appointment A will allows you to name an executor, the person responsible for managing your estate, paying off debts, and distributing assets according to your instructions.

Limitations of a Will

While a will is an important document, relying solely on it for your estate planning can be limiting. Here’s why:

1. Probate Process A will must go through probate, a court-supervised process to validate the will and oversee the distribution of assets. Probate can be lengthy, expensive, and public, potentially delaying the distribution of assets and exposing your estate to additional costs and scrutiny.

2. Limited Control Over Asset Distribution A will does not allow you to control how and when your beneficiaries receive their inheritance beyond immediate distribution. For example, if you want to provide for a child’s education or protect assets from creditors, a will cannot accomplish this. Trusts, on the other hand, offer greater flexibility in managing and distributing assets over time.

3. No Protection for Incapacity A will only takes effect after your death and does not address what happens if you become incapacitated. Comprehensive estate planning includes documents such as durable powers of attorney and healthcare directives to ensure your financial and medical decisions are handled by someone you trust if you are unable to make them yourself.

4. Potential for Disputes Wills can be contested, leading to family disputes and lengthy legal battles. Incorporating other estate planning tools, such as trusts, can help minimize the risk of disputes and provide clearer instructions for managing and distributing your assets.

5. Lack of Privacy Because probate is a public process, the contents of your will and details about your assets become part of the public record. This can expose your private affairs to public scrutiny. In contrast, trusts allow for a more private transfer of assets, keeping your financial matters confidential.

While a will is a crucial element of any estate plan, it has significant limitations that can make it insufficient on its own for many individuals and families in California. To create a comprehensive estate plan that addresses all your needs and provides greater control, flexibility, and privacy, consider incorporating additional tools such as trusts, powers of attorney, and healthcare directives.

What Needs to Happen When Someone Dies?

After a client has designed their estate plan, the most common question we get, by an overwhelming margin, is some form of “What needs to happen when someone dies? How does someone execute this estate plan we have created?”

Notice

When someone dies, there usually isn’t an alert that goes out to your loved ones, your banks, your employer, your utility companies, your credit card companies, etc. Well, unless you’re a celebrity. But for us non-celebrities, the news of one’s death trickles out organically. Loved ones handle the deceased’s remains and any rituals–funeral, memorial, wake, spiritual ceremony, etc. Sometime from a week up to a month and a half after the death, the county produces a death certificate. With the death certificate, the decedent’s loved ones begin to notify all interested parties and organizations of the decedent’s passing.

Knowledge

When the decedent’s loved ones are emotionally and psychologically ready, they begin to piece together what they can about the decedent’s life. This will include discovering the assets and debts of the decedent, obtaining control over any digital accounts and assets (like social media and cloud accounts), as well as determining whether the decedent had an estate plan. Hopefully, the decedent alerted the people involved in their estate plan as to the location of the estate planning documents. That’s not always the case, so sometimes this step may involve a bit of a “wild goose chase” for the documents.

Administration

Once it is determined whether there is an estate plan, steps are taken to administer the estate. There are two main routes of estate administration:

Only a Will, or no estate plan

If no estate plan is discovered, or the decedent only had a will, then the decedent’s estate must go through the probate process. Read our prior post about what probate entails. Our office can be retained to assist the loved ones guide the decedent’s estate through probate if there is only a will, or no estate plan at all.

Estate plan with a living trust

If the decedent died having created an estate plan built upon a living trust, then the administration of their assets is handled privately by way of trust administration. Trust administration is often quicker and less expensive than probate administration. The person named as the successor trustee of the living trust is tasked with carrying out the terms of the trust, along with providing notices required by law, marshaling and valuing assets, paying any debts and expenses, and distributing the remaining assets following the terms of the distribution provisions of the trust.

To assist them, the successor trustee can hire an attorney (like our office, for example!) to represent them in carrying out their duties. Trust administration can differ greatly from one trust to another. Also, trust administration varies greatly whether the decedent was married and survived by a spouse versus being unmarried or the second spouse to die. Trust administration can be handled by attorneys whether or not the attorneys drafted the estate plan.

If you lost a loved one, contact us to schedule a complimentary initial consultation to figure out next steps.

Funding Your Trust

Once you have created a trust, it’s important that you “fund” it. Funding the trust essentially means that you transfer ownership of your assets into the name of the trust. Instead of your name being on the account, it’s your name as trustee of the trust on the account. 

For example: the checking account of Joan Johnson becomes the checking account of Joan Johnson, trustee of the Johnson Living Trust, dated March 3, 2020. 

It is critical to fund your trust to avoid the time, expense, and public nature of probate. And to have a plan in place if an unexpected crisis arises. Having a trust unto itself doesn’t help you achieve that end; you have to get your assets into the name of the trust for the trust to be effective. Ideally, everything you own, besides your retirement accounts, is typically transferred into a living trust. If you don’t put your assets (like your house) into your trust, then your estate may still go through probate!

When we set up a trust for you, we provide you with complete funding instruction to address each type of asset and how to move it into the name of the trust. And if any questions arise, we welcome our clients to call us with any questions.

What is... Guardianship?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

Guardianship is a court proceeding where a court grants legal authority to someone other than a parent to care for a minor child. It’s legally appointing new parents for a minor child. This can mean taking care of the child day-to-day or it can mean taking care of the child’s finances; or, it can mean both. This typically needs to happen for orphaned children, but it sometimes happens when circumstances arise when parents are deemed unsuitable to care for their children.

Guardianship nominations are typically made in your will. When we talk about guardianship with our clients, we have a discussion surrounding who will take care of their children when they pass away or are permanently incapacited. Guardians can be family members, relatives, or even someone unrelated. They must be an adult, and must meet the court’s satisfaction to be suitable as a legal guardian, as determined by what is in the best interest of the child.

Some common issues to address when nominating guardians for minor children are the following: Is your preferred guardian a married couple? Do you want to nominate both spouses in the couple? What if they divorce, is there a preferred guardian? Are you nominating a guardian that would require your child to be uprooted from her/his life? Are you nominating someone who has the resources—both financial and time—to dedicate to your child?

Biological parents have first dibs on guardianship. And a court is most likely to grant guardianship to the biological parent, unless there is a reason not to do so. 

• In the case of a blended family, this would mean that the children of dad and ex-wife would go to ex-wife before they go to stepmom. 

• In the case of parents who are unmarried (and never were married), the child would go to the living parent, regardless of marital status. 

Guardianship is why any parent needs a will (in addition to a trust). It’s an important decision, and you need to document your choice so that it can speak when you are unable to. Do not leave it up to chance.

What is... Probate?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

You’ve probably heard the term probate, and you know there’s something that’s not good about it. But what is it?

Probate refers to the division of the Superior Court of California that handles issues related to conservatorship/incapacity, guardianship, or death. Each county in California has its own probate division.

Conservatorship: Conservatorships are legal proceedings that refer to a scenario where an adult can no longer make her own decisions, such as in the case of dementia or coma. If a loved one becomes incapacitated (e.g. through a sudden car accident, or stroke), someone will need to petition the probate court to be granted the legal authority to act on the loved one’s behalf. With this authority, that person (called a conservator) is able to call the insurance company or handle your loved one’s finances. A few considerations:

• Conservatorships take time. Each county typically has only one probate judge. So if a crisis arises, and someone needs to be conserved, it can often take 6-8 weeks in a busy county to get that first court hearing.

• Conservatorships are also expensive. The conservator must show the court that the incapacitated person’s money is being wisely spent. These accountings can take $3,000-$5,000 to prepare. And they’re required to be filed every year, or every other year. That’s not even mentioning the legal fees for hiring the specialized attorney you would need for these types of proceedings.

• Conservatorships are also public court proceedings. It can often be humiliating to the person being conserved.

Thankfully, you can avoid the need for a conservatorship by planning ahead and creating a durable power of attorney and a trust.

Guardianship: Guardianships are legal proceedings that refer to minor children (anyone under 18 years old) who have either become orphaned or removed from their parents. Those children now need someone with the legal authority to act as the child’s parents. Only a court can give someone such legal authority. By planning ahead, you can nominate in your will who those guardians are in the event guardianship proceedings are necessary for your young children. You certainly do not want to leave such an important decision to the busy members of the probate court who do not know you or your children.

Death: When someone dies, the state needs to ensure that the person’s debts are handled (e.g., outstanding credit card debt, other loans, utilities, funeral and medical expenses), and that any remaining assets reach the dead person’s rightful heirs.

• Like any other court proceeding, this is a public forum in which your debts and assets are uncovered.

• Probate takes a long time. It often takes 18-24 months for heirs to receive any of the deceased person’s property. That means that if there are young children relying on their parents’ property to survive, it can take months or years before they see a penny.

• In addition to the lengthy time that probate takes, it can also be costly. Probate fees--the compensation due to the representative of the estate and her attorney--are set by statute and are calculated based on the gross value of the estate. For example, a $1 million estate in California may generate as much as $46,000 in probate fees!

Most people want to avoid the time, expense, and public humiliation associated with probate court. By creating a comprehensive estate plan, including a trust, will, and power of attorney, you can avoid probate altogether at a fraction of the cost. Don’t wait until it’s too late.

What is... a Living Trust?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

At its core, a trust is a legal arrangement that deals with the ownership and management of property, both real estate (like your home) and personal property (e.g., jewelry, cash, bank accounts, your socks). The trust defines how property named in the trust is owned, who can control and manage it, and what type of control can be exercised over it. A trust also directs what happens to the property in it after the person or people who made the trust dies.

While there are different types of trusts, this post focuses on a “living trust,” also known as a “revocable trust,” because it is the most common type of trust used in estate planning. It’s a type of trust that you can amend, or make changes to, during your life.

One way to think about a living trust is that it is a box that you put your property in. After you put property into the box,  the box now has the value of everything you put in it. The box is controlled by a legal document with special instructions detailing who can reach into the box to add or remove property, how the property in the box must be handled, who benefits from the contents, and who ultimately gets the contents of the box. This legal document is the trust document signed by the person or people creating the trust. The trust document is just a fancy contract defining the rules surrounding property placed in the box.

Control and management of the property in the box is also very important. Initially, control is usually reserved for the people who put their property into the box. The people who put the property into the box are called “trustors.” The trust document specifies who can manage (sell, gift, invest, purchase) the contents in the box. The managers are called “trustees.” Because people who put property into the box usually want to control the contents while they are living, the trustors are usually also the initial trustees. You can have more than one job at the same time.

But what if something happens to the trustees--maybe they don’t have the ability to take care of the property in the box or they die? Who is going to take care of the property? In this situation the trust document will appoint what is called a “successor trustee” who is given access to the trust box contents when the initial trustees are unable. The trust document will also direct how the successor trustee must handle property in the box, and who should receive the property in it when the trustors die.

A typical living trust benefits the trustors (remember, those are the people who created the trust and supplied property into the box) while they are alive. So along with being the trustors and the initial trustees, they will also benefit from the contents of the box. They are the “beneficiaries” of the trust. Once the trustors have died, the trustors have described in the trust document who will become the beneficiaries of the contents of the box.

Ultimately, if created properly, a living trust ensures the property in the box will benefit the trustors during their lifetimes, that the property will be safely in the hands of trustees that will care for the property, and that the property will be distributed to beneficiaries according to the trustors wishes when they die. It’s a seamless transition that avoids the time, expense, and public process that is probate court (which is a court process that takes place if you die with only a will or with nothing in place). If the trustors have young children when the trustors die, a living trust can contain a comprehensive set of instructions for how to care for those young children with the property in the box.

Of course a living trust has more nuances and complexities than is described here. The success of any estate plan depends on it being carefully crafted to address individual desires and situations. We provide a free initial consultation where we can help you decide whether a living trust, or other type of estate plan, will best serve you.

What is... Intestacy?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

Simply put, intestacy is the word to describe what happens to your property when you die without a will. Intestacy is the state’s default method of determining your beneficiaries. This default is determined by the state in which you reside at the time you die (not the location of your death, say, if you die on vacation). If you reside in California when you die, and you don’t have a will, then the State of California has decided that your property goes to your surviving spouse (if you have one), if not, then to your children (if you have any), if not, then to your parents (if they’re still alive), if not, then to your siblings, then to your nieces/nephews, then to your uncles/aunts, then to your cousins, and on and on and on until someone in your family receives your property.

What if you literally have no other family by the time you die? Well, in that case, if you have no living relatives, the State of California will become the beneficiary.

Some people might look at the above and think,  “Yes! That’s what I would want anyway! So why do I need a will?” A will is more than just how you are giving away your things. It’s used for selecting a guardian for your minor children. It’s also where you would nominate the person who would handle closing all of your final affairs. This person is called an executor. Think of  the person paying for final bills (like an outstanding credit card bill or electric bill), who determines what to do with all of your knick-knacks, and other affairs of a personal nature. If you have a living trust, a will is necessary to ensure that all of the assets you never got around to transferring into your trust end up in your trust (called a “pour over will”).

If you die intestate (remember, that means without a will), none of your friends, girlfriend or boyfriend, or favorite charities will receive anything. Those people aren’t considered your relatives in the default scenario. Also, once your property passes on to someone else, you have no control what happens to it after that. Your property is now a part of that person’s estate and not yours. So, for example, if you wanted your things to go to your nieces/nephews but not to your siblings, you don’t get to control that if you die intestate. Intestacy goes in the order described above only.

The good news is that intestacy is a completely preventable situation! During your life you can create an estate plan (definitely a will and maybe a trust, depending on your situation) that will ensure that your assets go to the people or organizations you want them to go to. You also get to choose who gets to handle all of your final affairs, and to provide to them clear instructions.  

To determine what kind of estate plan you and your family needs, please contact us for a free initial consultation.

What is... a Will?

This post is the first part of a series of blog posts we are launching that we call the "What is..." series. This blog series will explain common estate planning terms and instruments in concise, easy to understand posts.

A will is a document that tells the world what someone wants to happen to their money, their things, and who should care for their minor children when they die.

In a will, you can name specific people you want to receive specific items, like your favorite baseball or a piece of jewelry. You can also name whether you want anyone to get a certain amount of money. (The people you name are called beneficiaries.) You also should indicate what you want to be done with any remaining things or money (your assets) that are left over after you’ve specified what happens.

A will also allows you to designate a guardian for your minor children if you and the other parent die before any child turns 18 years of age.

In a will, you also nominate an executor. This person is responsible for carrying out the wishes listed in your will, paying any outstanding debts (think of the balance on your credit card bill!), taxes, or other cost.

The will does not cover things that have designated beneficiaries built in. For example, a life insurance policy or a retirement plan (401(k) or IRA) allows you to designate a beneficiary. The will does not change who you listed on those accounts.

So why can’t you just write your own will?

Legally, you can. California recognizes handwritten wills when certain conditions are met.  

But here’s the problem: a will only goes into effect when a person dies. It only covers one scenario. For example, a will does not go into effect if a person is incapacitated. A person is incapacitated if he or she is in a coma, or suffers from dementia, or even while under anesthesia in surgery. Essentially, any time someone cannot make his or her own decisions, that person is considered to be incapacitated.

A will also requires that your estate go through probate court. Probate is a court proceeding, and like most court proceedings, it means that your will (including your assets listed in the will) becomes public. It means that your executor has to spend time and money to make sure that your bills and taxes are paid, and that your stuff gets where you want it to go. Probate costs money because there are fees associated with the process, like executor fees and attorneys fees. In California, there’s a statute that states how much money the executor and his or her  lawyer can get in probate.

How can you make sure that you are covered if you’re incapacitated? How can you ensure that you avoid probate? The short answer is that creating a comprehensive estate plan built upon a living trust might be the answer.

To determine what kind of estate plan you and your family needs, please contact us for a free initial consultation at info@shafaelaw.com.

What is an Estate Plan and do I need one?

This is by far the most common question we receive. The word "estate plan" seems like it means so many things, and it's difficult for people to nail down what it entails. You know why? Because it does mean so many things.

An estate plan is a general term that encompasses all of the tools one can use to plan for two events: a) their eventual death; or b) their potential incapacity. Most people contemplate option a), albeit very passively. Option b) is one people very often forget about. Incapacity is when you cannot make your own financial or medical decisions. Think: coma, dementia, etc. You're still alive, but someone else needs to make decisions for you. In that event, someone else needs the legal authority to make decisions on your behalf. You can either give it to them ahead of time in a power of attorney, or someone can petition a court to grant them that authority in a conservatorship proceeding.

In planning for your death, there are two basic ways to pass on (distribute) your assets upon your death. One, by using a last will. Two, by employing a living trust. The former requires a court process called "probate", whereby a judge overseas all of the affairs of your estate administration (paying your creditors, selling estate assets, and eventually distributing your assets to your rightful beneficiaries). The latter is a private document that keeps the courts (and the public) out of your estate administration. The probate process can be expensive. For example, the fees (paid to your executor and their attorney) can be as high as $46,000 for an estate valued at $1,000,000. Most properties in the Bay Area are at or above that amount. So you can see that an estate in the probate process can be quite expensive. The probate process can also be lengthy. Most probate administrations take an average of 18 to 24 months to complete.

Now that we've covered what an estate plan might entail (trust, will, powers of attorney), who needs one? Well, in one word: everyone. Everyone will die someday, and you never know when/if you'll ever be incapacitated. The more nuanced question is, "Do I need an estate plan that includes a living trust?"

If the answer to any of the following questions is "yes" then you probably need an estate plan that includes a living trust.

1. Does the total value of your assets (cash, personal property, real estate, cars, investment portfolio, etc.) exceed $150,000 in the aggregate?
2. Do you own real estate valued over $50,000?
3. Do you have children under the age of 18?
4. Have you divorced someone with whom you had children?
5. Are you in a mixed marriage (one or both of you have children from a previous relationship)?

Please keep in mind that if you think you don't need an estate plan with a living trust, if you're over 18 years of age, you at least need a last will and a power of attorney. For example, if your child is about to head off to college, they're over 18 years of age, and they unexpectedly fall into a coma, you have no legal authority to make decisions on your child's behalf absent a power of attorney or court order.

If you'd like to speak in further detail about your personal situation, please do not hesitate to contact us for a free consultation.