Why an Unfunded Trust Can Send Your Estate Back to Probate

We’ve seen this all too often. A new client walks in and tells us they have created a trust document. 

The first question we ask: Did you fund it properly? 

Their answer: What do you mean by “fund it”?

You created a revocable living trust, knowing that one of the major values of a trust is that your estate will avoid probate. There is one big caveat: it only avoids probate if you fund it properly. Avoiding probate depends on properly titling assets in the trust and ensuring beneficiary designations align with the overall plan.

Creating a trust document is a great idea. A trust offers many benefits, including privacy, probate avoidance, control over distributions, and more. But creating a trust is half the battle. The other half? Funding it.

Typically, the attorney who helped draft your trust will help you fund your real estate property into the trust. This is an important step to ensure your real estate property avoids probate.

But what about your other assets? You have bank accounts, brokerage accounts, IRAs, 401(k) plans, life insurance, HSA accounts, and more. Typically, the estate attorney isn’t taking you through the steps of funding these accounts – you are responsible for ensuring you title your accounts and beneficiaries properly. 

The estate attorney more than likely gave you a set of “funding instructions”. These funding instructions tell you how to title all of your accounts properly and how to list your beneficiaries.

You will retitle financial accounts, including brokerage, non-qualified investment, and bank accounts. For example, instead of the John Smith & Sally Smith Joint Tenants With Rights of Survivorship (JTWORS) Account, the account is re-titled as The John & Sally Smith Revocable Living Trust dated March 15, 2024.

Some accounts are not retitled; instead, they name the beneficiaries directly or the trust as the beneficiary. For example, you might list your trust as a beneficiary of your life insurance policies.

Regarding 401(k)s and IRAs, make sure you discuss the beneficiary designations for your IRAs and 401(k)s with your attorney. Unless you have a strong reason to leave a 401(k) / IRA account to a trust, such as:

• The beneficiaries are minors that you don’t want to inherit the money when they reach the age of majority (typically 18 years old)
• The beneficiary is a spendthrift 
• They have a mental illness 
• They have special needs

It is typically not advisable to name a trust as the beneficiary of a 401(k) or IRA, as this can create unnecessary complexity in asset distribution and taxation.

You certainly do not want to re-title a 401(k) or IRA into a trust, as that would force a distribution and trigger a full taxable distribution. 

While you can list your trust as a beneficiary, as stated above, you will want to make sure there is a good reason to do so.

Conclusion

Creating a trust is only the first step; funding it is what allows the plan to function as intended. Properly retitling assets, coordinating beneficiary designations, and periodically reviewing your accounts ensure that your estate actually avoids probate and that your wishes are carried out efficiently.

Funding is not a one-time task. Over time, you will open new accounts, change employers, purchase or sell property, and update beneficiaries. Each of these changes creates an opportunity for assets to unintentionally fall outside of your trust if they are not reviewed and aligned with your estate plan.

Probate avoidance is achievable—but it requires ongoing attention, coordination, and execution. When your trust is properly funded and maintained, it becomes the powerful planning tool it was designed to be, helping you and your family move forward with clarity and confidence.

The Vocare Wealth Advisors Team

This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The foregoing information has been obtained from sources considered to be reliable. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any opinions are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making a decision, please consult with your financial advisor about your individual situation.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFSA, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.