What is a Revocable Trust?
A Revocable Trust, often known as a Living Trust or Inter Vivos Trust, is a legal arrangement designed to provide flexibility and control over assets, allowing the Grantor (the person who creates the trust) to alter or revoke the trust during their lifetime. However, the trust's creation is only the first step. For the trust to be functional and achieve the intended benefits, it must be properly funded by transferring assets into it.
Revocable Trusts represent an essential estate planning tool that can provide substantial benefits to individuals and their beneficiaries. However, many people make the mistake of establishing these trusts but not funding them during their lifetime. This paper aims to explain the importance of funding Revocable Trusts during one's lifetime and the issues that can be circumvented by doing so. This paper will further underline the potential negative impacts of not funding a trust and how it can lead to potential legal disputes, increased probate costs, and delays in asset distribution.
Three Main Reasons to Fund a Revocable Trust
1. Avoidance of Probate
One of the key advantages of a Revocable Trust is the ability to avoid probate, a typically lengthy and costly court-supervised process for distributing assets after death. However, this advantage only materializes if the trust is adequately funded during the Grantor's lifetime. An unfunded or partially funded trust does not bypass the probate process, leading to potential delays in asset distribution and increased costs.
Probate is a public process, meaning the details of the decedent's assets and who they're distributed to are accessible to the public. A fully funded trust allows for the private administration and distribution of assets, protecting the family's privacy.
3. Facilitated Management Upon Incapacity
Should the Grantor become incapacitated, a fully funded trust enables a smooth transition of management to the Successor Trustee, who can manage and use the assets for the Grantor's benefit without court intervention. An unfunded trust, on the other hand, does not provide this seamless transition, often leading to a court-supervised conservatorship or guardianship.
Three Bad Consequences of Not Funding a Revocable Trust
1. Asset Distribution Delays
An unfunded trust can lead to significant delays in asset distribution following the Grantor's death. This is because these assets will have to undergo probate before they can be distributed to the beneficiaries. This can take months or even years, during which the assets may be inaccessible to the intended recipients.
2. Increased Costs
The probate process can be costly, involving court fees, attorney fees, executor fees, and other administrative costs. These costs can significantly reduce the value of the estate that the beneficiaries eventually receive.
3. Potential Legal Disputes
If a trust is not fully funded, the distribution of assets may not align with the Grantor's intended estate plan, leading to potential disputes among heirs and beneficiaries. These conflicts can be costly, time-consuming, and emotionally draining.
The advantages of a Revocable Trust are clear: avoiding probate, maintaining privacy, and providing for a smooth transition of asset management in the event of the Grantor's incapacity. However, these benefits are only achievable if the trust is properly funded during the Grantor's lifetime. Failure to do so can lead to probate, increased costs, delays in asset distribution, and potential legal disputes. Therefore, for individuals establishing a Revocable Trust as part of their estate plan, it is crucial to fund the trust adequately and promptly to realize its full potential and benefits.