The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.
In some jurisdictions, lack of any trust corpus (even just a couple dollars, or some personal property) will cause the trust to be treated as if it were never created to begin with, and attempts to place assets into such a trust in the future cannot salvage or resurrect the defunct trust. Most trusts that are created have some modicum of a trust corpus to prevent such a disaster. Therefore, having anything in the trust will prevent it from failing, right? That depends on your definition of “fail”. In order to answer the question, one must first understand how funding works in relationship to a trust.
How does a trust work?
Think of a trust as a cardboard box. One writes instructions on the outside of the box about what one wants done with the things that are in the box. The trustmaker then takes the “box” and puts it into the hands of someone the trustmaker can rely on – that’s the trustee. The trustee’s job is to follow the trustmaker’s instructions with regard to the things that are in the box.
What will happen if the box is empty when the trustee attempts to follow the trustmaker’s instructions after the trustmaker has died?
The trustee only has authority over what is in the trust, so if there is nothing in the trust, then there is nothing for the trustee to do. (And as mentioned previously, if there is really nothing in the trust, then it may be void, depending on the jurisdiction.)
Anything left outside the trust is outside of the trustee’s control. That means that the trustmaker’s directions will not be followed with regard to those assets that are out of the trust. Some assets may find their way back into the trust through a pour-over will, but typically this requires the expense, delay, and publicity of probate to do so.
The process we call “funding” is the process of titling assets so that they are in the trust “box” – controlled by the trustee. These assets will be controlled by the trustmaker’s directions without the need for probate.
So, back to our question: having anything in the trust will prevent it from failing, right?
If the measure of success is mere legal sufficiency, then that is correct. However, the true measure of a trust’s success is not whether it is “legally sufficient,” but whether the trust meets the client’s goals. One common motivation many have for seeking out an attorney to create a trust is so that their family will be able to avoid the cost, delay, and publicity of probate on their death. Failure to fully fund a trust means that the client’s directions will not be followed (with regard to those assets not in the trust), or at least that probate will not be avoided. If a trust fails to do what the client wanted (transfer assets by specific instructions contained in the trust, or avoid probate, for example), then it has failed whether the trust is legally sufficient or not.
Hopefully, when one buys a gallon of milk at the grocery store, it comes in a container. But what if one pays for a gallon of milk and only gets an empty container? or a half full container? We would be upset, and rightly so. However, people buy empty (or, at least, not full) trust boxes frequently, and do not realize the reduced value they are receiving. Make sure your clients are getting full value for their estate plan by working with an attorney who will ensure the trust box is full when created, and that it stays that way.