You have an estate plan that includes a living trust. Should you fund it now? There can be benefit to your family in doing so, but it will require some work and effort on your part. The answer ultimately depends on your thoughts on the following issues.
Avoiding Probate. Funding your trust is usually recommended to avoid probate of your assets upon your death. As a practical matter, probate is not a cumbersome process that needs to be avoided like the plague. Probate is the post-death legal process by which assets that are in your individual name (and which do not have a designated beneficiary) are administered and eventually transferred to your beneficiaries. Assets in a living trust avoid probate because you don't own them anymore, the trust does.
Michigan's probate process is very streamlined and involves limited court involvement in most situations. The additional cost of probate is minimal, but all probate involves some cost and public notice. What usually takes the time and effort of those administering your estate is the general administration of your assets, whether in a trust or not. If you own a house, it may need to be prepared for sale and sold. If you have many bank or brokerage accounts, those may need to be consolidated and invested. If your estate is greater than $1,500,000, a federal and Michigan estate tax return will need to be filed. All of these issues need to be dealt with regardless of whether you have probate proceedings.
Avoiding Publicity. Funding your trust may maintain confidentiality with respect to the size and contents of your estate because a trust is private. Wills and all probate proceedings, on the other hand, are matters of public record and can be reviewed by the general public upon request. In addition, in a supervised probate proceeding, a detailed inventory of your estate is made part of the public record. Most probate proceedings in Michigan, however, are opened under "informal" proceedings, and the nature and content of your assets is not public record.
Management of Assets. Funding your trust may assist in the management of your assets during your lifetime, however, similar asset management can often be achieved by a durable power of attorney. This is usually an issue only if you become unable to handle your own finances. If that were to occur, you need someone else with the authority to manage your affairs. If you have assets in your name alone and you have a durable power of attorney, it is the agent you have named under that document. If you have a trust and you have funded your trust during your lifetime, it is the successor trustee. If you have neither a trust nor a durable power of attorney, then it may be necessary to petition the probate court to have a conservator appointed for you. The court will continue to oversee the management of your affairs.
Protection from Creditors and Tax. There are no significant tax advantages to funding your trust during lifetime. All items of income, deduction and credit are reported on your individual tax return. There is also no death tax advantage to funding your trust during your lifetime. All assets in your trust are taxable in your estate for death tax purposes. Placing assets in your trust generally will not protect the assets from your creditors. As a practical matter, it may make it more difficult for a creditor to discover the assets, but there is no additional legal protection.
Avoiding Challenges to the Will. Funding your trust during your lifetime will not prohibit a challenge from family members, but may make a challenge by beneficiaries more difficult, particularly if your estate passes to collateral relatives, charities or other individuals who are not immediate members of your family. Waiting until death to fund the trust means your heirs will be given notice of your will and for some it is important to avoid this notice.
Funding Your Trust. To "fund" your trust, you must transfer title to assets in your individual name to your trust. Everyone's assets will differ, and the effort involved will depend on the types of assets you own. Brokerage and bank accounts are transferred by completing new account forms. Transfers of real estate require detailed real estate documents and possible notification to lenders and insurance companies. Motor vehicles and boats are best left in individual name because a sales tax may be imposed on their value if title is changed to the trust.
In sum, funding your trust during lifetime may simplify administration of your affairs during your lifetime if you become incapacitated, and may simplify administration of your estate upon your death. Those advantages must be weighed against the expense and effort that you must undertake yourself to transfer the assets to your trust. Fully avoiding probate, especially given Michigan's streamlined probate procedures, is not for everyone but should be considered as part of your planning.
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Susan Gell Meyers, is a partner with Warner Norcross & Judd LLP and she focuses her practice in estate planning and administration and closely held business law. Susan may be reached in the Grand Rapids office at 616.752.2184. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.