Anyone thinking of creating an estate plan is ahead of the curve, but there are many types of plans, and it’s not always easy to know which one is right for you. Far too many people make the mistake of writing a will and leaving it at that. But putting all your faith in a last will and testament can create problems down the road, and your families can be blindsided when a confusing term or poorly worded sentence throws their estate’s future into uncertainty.
Revocable trusts provide far more protection than simple wills, but they’re subject to a litany of rules that can be difficult to understand. One of the most important rules relates to funding, or the assets needed to make a trust fulfill its mission.
Landskind & Ricaforte Law Group P.C. has spent years helping Brooklyn families protect their legacies and preserve their peace of mind. Here, our New York City estate planning lawyers explain how to fund a trust.
Revocable Trusts in New York City and State
In simple terms, a trust is a distinct type of legal arrangement between several different parties. When you establish a trust, you are agreeing to use certain assets for a specific purpose. Most of the time, this means leaving money, property, or possessions to a pre-selected set of beneficiaries. After you pass away, a designated successor trustee will distribute your trust assets in accordance with your wishes.
Trusts come in several different forms, each with its own advantages and drawbacks.
One of the most popular kinds of trust in New York is the revocable trust, sometimes called a revocable living trust. With a revocable trust, you can:
- Protect your family’s privacy
- Keep your assets out of probate
- Provide greater asset protection for your heirs
- Set firm conditions on inheritances, their distribution, and use
Revocable trusts can be altered or terminated at any point during your lifetime. You retain the right to access and manage your trust assets, and you can even name yourself as trustee, provided you’ve chosen a successor to manage your trust after you’re gone.
The Key Components of Every Trust
Every state has its own rules for trusts, and some are even subject to federal law. However, no matter your trust’s size, location, and complexity, it must incorporate several key components:
- The trustor. A trustor is somebody who establishes a trust. Most trustors are also responsible for funding their trusts with appropriate assets.
- The successor trustee. The successor trustee is the person who administers your trust after you die. Successor trustees have many duties but are primarily responsible for faithfully executing the terms of the trust in the exclusive interest of its beneficiaries. You can name more than one successor trustee, and it is sometimes a good idea to do so.
- The beneficiary. The beneficiary is the person or party who receives distributions from the trust. Your beneficiary can be one person, many people, or even a non-human entity, such as a pet, charity, or corporation.
Taken together, these three elements constitute the general structure of almost every revocable trust in New York—but they are not the only elements necessary under the law. Aside from drafting trust documents and appointing trustees and beneficiaries, you also need a source of funding.
Funding a Revocable Living Trust With Personal Assets
Funding a trust simply means transferring assets to the trust’s control. Without assets, your trust cannot operate—and if it cannot operate, it is not valid under New York law. Fortunately, you can fund a trust with almost any type of asset imaginable. These include, but are not limited to, the following:
- Cash accounts and other liquid assets
- Real estate, including your house, vacation home, or any commercial properties you own
- Shares of stock from certain companies and corporations
- Non-retirement investment assets, such as mutual fund accounts
- Firearms
- Artwork
In short, there aren’t very many restrictions on what can and can’t go into a trust. However, your funding must be sufficient to cover the costs of the trust’s purpose as well as its administration. This means making sure there is enough money to sustain your trust and pay your successor trustee, who is entitled to compensation by law.
Funding a Revocable Living Trust with Business Assets
You can transfer business interests to a revocable living trust, too. If you own a company, transferring business assets and interests can provide income tax relief and create a firm separation between your personal liabilities and your business liabilities. In some cases, placing business assets in a trust can even eliminate estate taxes.
Placing a business in a revocable trust is easiest if it’s a:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
Other types of business interests cannot be held by trusts, but telling the difference isn’t always easy. If you have concerns, contact our experienced New York City trust and estate planning lawyers to help ensure you understand these differences.
Assets to Avoid Placing in a Trust
You need assets to fund your trust, but some assets either cannot be placed in a trust or should not be placed in a trust. Some of the most noticeable examples include:
- Financial accounts that you’re currently using
- Retirement accounts like IRAs, 401(k)s, and 403(b)s
- Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs)
- High-value assets that aren’t subject to probate, such as a personal vehicle
- Low-value estates that either are not subject to probate or qualify for simplified probate
Some of these examples have workarounds. Life insurance, for instance, can be problematic if it pushes the combined value of your trust and personal assets in range of the federal or state estate tax. This doesn’t necessarily mean that a trust is a bad idea. Instead, it indicates that you may need to talk through alternatives with your estate planning lawyer, like naming your trust as an insurance beneficiary or forming a separate irrevocable life insurance trust (ILIT).