Trust Funding: Why Your Living Trust Is Still Empty

Attorney Greg Robinson

Picture a binder on a shelf in your living room. Three years old, a little dusty. You paid somewhere in the range of $3,000 to $5,000 for what's inside it. A living trust. And you have never, not once, moved a single asset into it.

Attorney Greg Robinson

That's trust funding, and that's today. And here's the question nobody asks the day they sign. If the trust is finished, what, exactly, is it holding?

Attorney Greg Robinson

Nothing. You bought the safe. You never put anything in it. It's an empty safe with a very expensive combination lock. Think about the county courthouse for a second. If the deed there still says your name, just your name, then the record says you own that house, not the trust. So when you pass, probate is still required. It doesn't matter what the binder says. The trust only controls what it owns. Signing is not funding. Funding is retitling.

Attorney Greg Robinson

Now I can hear you. You're saying, Greg, I signed it in front of a notary, I, I, I did the thing. And I get that. Signing creates the trust. It just doesn't give it anything to own.

Attorney Greg Robinson

A Texas real estate attorney, David Willis, says it plainly in an article on living trusts. He writes, quote, conveying the property by deed into the living trust is an essential part of the process. He adds that the trust agreement by itself does not transfer title. So, for the house, that means a deed, recorded in the correct county. The county where the property sits. Not where you live now, not where the lawyer's office is.

Attorney Greg Robinson

Okay, but the mortgage. Won't the bank call the whole loan the minute you deed it?

Attorney Greg Robinson

That's the myth that stalls more families than anything. Most mortgages have a due on sale clause. But Congress dealt with this in 1982, in the Garn St. Germain Act. Twelve U.S.C. section 1701j 3, subsection d, paragraph 8. It says a lender may not use that clause on, quote, a transfer into an inter vivos trust in which the borrower is and remains a beneficiary. Plain English? You live there, you're still the beneficiary of your own revocable trust, the bank can't accelerate the loan.

Attorney Greg Robinson

Then there's the homestead fear. In Texas, I'm going to say this clearly, because it's the number one reason Texans stall. Your homestead exemption survives a properly drafted revocable trust. You keep the right to revoke it or to live there rent free, and the deed gets recorded in the county real property records. Do that, and the law treats the home as your homestead.

Attorney Greg Robinson

In Alabama, we check the homestead exemption and the ad valorem treatment as part of the deed, so nothing shows up on your tax bill that you didn't expect. And one more small step people forget. Call your insurer, tell them the deed changed, and have the trust named as an interested party.

Attorney Greg Robinson

Now the trap that can really hurt you. Retirement accounts. Do not retitle a 401(k) or a traditional IRA into the trust's name. Doing that can be treated as a full distribution. One hundred percent taxable, right away. A tax bomb, and you lit the fuse yourself.

Attorney Greg Robinson

So how does a retirement account work with a trust? Through the beneficiary form. Primary and contingent, updated so they match the plan in the binder. Life insurance works the same way. Name the beneficiary, or use an ILIT, an irrevocable life insurance trust. The account stays put. The form does the work.

Attorney Greg Robinson

So if I say it back the way a listener might. The house gets a deed. The retirement money gets a form. Two different tools, same goal. That's right, and mixing them up is exactly where families get hurt.

Attorney Greg Robinson

An LLC is different. There you sign an Assignment of Member Interest. But, uh, read the operating agreement first. It has to permit the transfer, or you've got a second problem on your hands.

Attorney Greg Robinson

Here's what I notice about why families freeze. Legal paperwork feels like a test you might fail. So the binder sits there, because opening it feels like admitting something. I see it differently. Waiting for a crisis means fewer options, court involvement, and family conflict. Acting now starts the clock in your favor.

Attorney Greg Robinson

And you can run the audit yourself in an afternoon. Three things. The binder. The latest recorded deed. And your current account statements. Check the deed first. Is it recorded, in the right county, in the trust's name? Then the statements. Whose name is on each one? Then the beneficiary forms. A three year old plan usually gets one of those three wrong. Sometimes all three.

Attorney Greg Robinson

If you already paid for a trust, you did the hard part. You made the decision. What's left is clerical, and clerical is fixable in an afternoon. Get the binder, get the deed, get the last statement, and finish what you started so the thing you bought actually works.