5 Problems with an Unfunded Trust

You likely already know that a trust is one of the best ways to avoid probate and control the distribution of your estate. But having trust documents in your safety deposit box or cloud storage isn’t enough. The problems with an unfunded trust can create a lot of stress for your heirs and beneficiaries, and subject them to probate proceedings and, if your assets are large enough, estate taxes. Find out how to properly fund your trust and what happens when you don’t.

How Do You Fund a Trust?

Using a revocable living trust or an irrevocable trust can make it easier for your trustee to use your assets to provide for your end-of-life care and then use the remaining assets for your beneficiaries’ benefit after your death. But drafting a trust describing your intent for your assets is only step one of the trust administration process. A properly executed trust document is necessary to create an enforceable trust, but it can’t do everything alone. For that you have to fund your trust.

Remember that a trust is a separate legal entity that continues on after your death. Because the assets no longer belong to you, they are not included in your probate estate, but only if the trust is funded.

To fund a trust, you must transfer your property from your own name into the name of the trust. This may include:

• Deeds for real estate
• New or updated beneficiary designations for insurance policies, retirement and investment assets, and transfer on death accounts
• Transfers of ownership for business entities, bank accounts, or similar assets for certain clients.

This may feel like a lot of unnecessary paperwork. But an unfunded trust can create problems for your beneficiaries after your death.

Is an Unfunded Trust Valid?

Your trustee can only manage assets within the trust itself. Because of this, an unfunded trust is useless. It leaves your trustee nothing to manage. While the trust itself remains a valid legal entity, it will not be able to serve its intended purposes. Whether your priority is avoiding probate, minimizing estate tax consequences, or controlling your assets after death, an unfunded trust will not work well to accomplish those goals. Instead it will be an empty shell with little if any practical value. If your estate planning attorney prepares a pourover will providing that any assets which are not part of the trust become part of the trust after a probate is done, then your money may end up where you want it in the end, but not without creating big headaches for your family.

5 Problems with an Unfunded Trust

If you fail to fund your trust it can create problems for you, during your final illness, and your loved ones after your death:

Incapacity and Unfunded Trusts

One problem with an unfunded trust is that it prevents your successor trustee from taking control of your assets when you are still alive but physically or mentally incapacitated. One of the benefits of creating a revocable living trust is that it can allow your loved ones to avoid going to the Florida probate court for a conservatorship to manage your assets during your lifetime. Control over a trust transfers to your successor trustee automatically when you become medically incapacitated. That means someone is always available to manage the trust’s finances. However, an unfunded trust gives your successor trustee all the authority but no ability to use it. Without assets in the trust, your successor trustee will be unable to pay your medical bills, provide for assisted living expenses, or pay your bills.

An Unfunded Trust Exposes Your Assets to Probate Court

One of the main reasons people use a trust instead of, or in addition to, a standard Last Will and Testament is because they want to reduce or eliminate the need for probate administration and court oversight. If your estate plan includes a Pour-Over Will, some of those assets may be transferred into your trust after your death. However, any assets not transferred during your lifetime must still be distributed through the Florida probate court. An unfunded trust leaves all your assets in your name at the time of your death. That means the probate court will need to oversee the distribution of those assets.

Assets Outside Your Trust Aren’t Controlled by Your Trust Instructions

Trusts give you more control over when, how, and under what circumstances your beneficiaries will be given access to your assets than in probate court. You can place restrictions on the use of trust funds and delay the distribution of trust assets until younger beneficiaries have enough life experience to make smart investment choices.

However, those restrictions and instructions only apply to assets in the trustee’s control – in other words, the assets funding your trust. An unfunded trust leaves those assets under the control of the Florida probate court. They will be distributed according to your Will (or Pourover Will), if you have one, or using Florida intestate law if you don’t.

The Battle Between Trust Beneficiaries and Next of Kin

One often overlooked problem of an unfunded trust is that it can create conflict between trust beneficiaries and your statutory next of kin. This can result in probate litigation as your loved ones argue over who should receive your assets, and whether your property should be kept for the beneficiaries’ benefit, or sold and the profits divided among your next of kin. A pour-over will may alleviate but not eliminate this problem.

Contact Our Gainesville Trust Fund Lawyer for a Complimentary Consultation

The probate and trust attorneys at Harrison Estate Law are happy to help you set up and fund your revocable trust. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville we are happy to set up a phone or Zoom call.