When setting up a trust, preparing the documents does not finish the process. If the person who sets up the trust fails to properly transfer their assets into it, it can become an underfunded or unfunded. This lack of proper funding can lead to a failure of a person’s estate plan, and also increases the potential for disputes throughout the process of probating the estate.
What an Unfunded Trust Is
A trust is a legal construction that involves a trustor, a trustee, and a beneficiary. The trustor creates the trust and transfers assets into it. The trustee manages the assets in the trust and they do so with the best interests of the beneficiary in mind. The drafting of the trust instrument is a key part of this process. That document will outline many of the legal rights and responsibilities of the trustee and the beneficiary, and it can provide instructions for the trustee to follow.
Many people think that once they draft the trust document, the process is complete and the trustee will be able to carry out their desires. This is not the case. The person will also need to legally transfer the assets to the trust. Without doing so, the trustee may not actually be able to control the assets and distribute them in accordance with the trustor’s instructions.
The Consequences of Improper Trust Funding
Improper trust funding can lead to disputes between heirs throughout the probate process. This is because if the trustee does not properly fund the trust the trustee has no legal authority to carry out the wishes of the trustee. Instead, the assets would pass through any will that the trustee left behind, or they may pass through right of survivorship, the default way that courts distribute assets. This means that the beneficiaries of the trust may end up in a legal battle with the heirs listed in the will over their rights to the assets.
Additionally, even if the trustor did not leave a will and there are no disputes, the assets will still need to go through the state probate process to be distributed. This can lengthen the amount of time it takes to wind down a person’s affairs and tends to be a less convenient process than if the trust had been properly funded.