What Goes Into a Trust?

Although the task of funding one's trust - that is, transferring assets into the trust - can be a minor hassle, it is a straightforward and relatively easy task. However, before we can discuss how to fund your trust, we first need to determine what should go into your trust.

One of the most important parts of the initial meeting with our estate planning clients is when we go over what their assets are and determine what should go into their trust, and what can stay out. When doing so, we always adhere to our main rule: avoid probate. Here in California, probate is required for any real estate – its value only determines what route in court you take – and assets that, when added altogether, equal $166,250 or more. Thus, we need to make sure there is no real estate outside the trust, and the financial assets left out of the trust equal less than $166,250 when put together.

Legal Note: This figure has increased for death occurring on or after April 1, 2022, to $184,500.

To begin, we always start small with your checking account that runs your normal monthly bills and where you might be receiving automatic deposits for something like social security or your normal income. This you can leave outside your trust since the value won't be high enough to trigger a probate as most Americans don't keep more than $10,500 in their checking account. Additionally, leaving your checking account out makes it easier for someone to step in under a Financial Power of Attorney and help you manage your everyday bills and finances.

Next, we go to your other cash accounts - savings, money markets and CDs. These are accounts we typically recommend for our clients retitle into the name of their trust by going into the bank and having the account holder updated. Larger sums are typically held in these and can easily push one just over the probate threshold if they leave one or two of these out of the trust. There is some variability here as some of our clients don't keep much in these types of accounts, instead opting to invest the money elsewhere. In those cases, we typically caution not to let the account go over $50,000 to $60,000 if they elect to leave the account outside of the trust. Make sure you know whether your bank considers retitling of a CD an "early withdrawal" so as to avoid unexpected penalties or fees.

Staying in the realm of finances but another level up, we go to investment accounts: non-retirement investments, brokerage accounts, non-qualified annuities, or even stocks and bonds held in certificate form. These are assets where we’re hard pressed to find a reason not to put them in trust. In fact, the only reason not to would be because you have a beneficiary designated on the account directly with the company. If an asset has a beneficiary, then it becomes the property of that person when you pass away and is not counted towards the probate calculation. Keep in mind, however, if there is a beneficiary designation, then you will need to keep that updated should the family dynamics change, otherwise, risk a probate.

Another large asset that should go into your trust is one I've already mentioned - real estate. Again, all real estate triggers a probate here in California (and in most states), meaning all real property should go into your trust and not be left in your name as an individual. Keep in mind, the mortgage essentially "follows" the property and lenders are prohibited by law from calling a loan immediately just because a beneficiary inherited a home. They inherit the mortgage as well.

Finally, we take a look as miscellaneous assets. Rights owned by you such as outstanding loans to others or oil, gas and mineral rights should also be transferred to you as they are assets. Both can typically be done with simply assignments of interest, but oil, gas and mineral rights sometimes also require a deed.

Business interests – LLCs, corporations, partnerships, etc. – should also be assigned to your trust so your successor trustee can step in without delay upon your passing. You will need to verify you can transfer your interest to your trust with the company's operating agreements or bylaws first. Additionally, it avoids the entire issue of a valuation of the business (a task that can be quite arduous) since holding one's interest in trust avoids probate.

Life insurance policies may be able to be transferred to your trust and are often times large enough to trigger a probate if left in one's estate. However, your safest bet is to simply pick people as the beneficiary and your trust as a contingent beneficiary. Remember, picking a beneficiary keeps the asset - here, the life insurance benefit - out of the probate calculation by it becoming the property of the beneficiary at your death, thus allowing life insurance to remain outside of your trust.

Finally, tangible personal property can be assigned to your trust, but it is often not necessary unless there is a particular item that may be valuable on its own. Some examples include artwork, firearms, boats, airplanes, collectibles, jewelry, cars, and more exotic pets like cattle or horses. As with smaller cash accounts, there is some variability here as well. Typically, motor vehicles depreciate too quickly to worry about reaching the probate threshold, its often easier to deal with the DMV if the vehicle is not in trust and many states do not allow creditor protection even if there is a revocable living trust (such as in California), thus there isn't even the threat of litigation from an accident to force the matter.

Ultimately, everyone's situation is going to vary wildly. Aside from making sure your documents are done correctly, you should always speak to an attorney about your estate plan to ensure all your assets are accounted for and that there are no lose threads that can spiral into a massive knot for your family to untangle.

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