Q: What happens to a trust if it isn't funded?
A: Nothing. It just kind of sits there and waits for something to happen.
Think of a trust as a box that you put your stuff into. Once you do that, you no longer own the stuff but you own the box that all of the stuff is kept in. If you don't put anything in the box, you still own the box — only it's empty.
Some trusts aren't funded until some event occurs later, such as a death. Some Irrevocable Life Insurance Trusts (ILITs) own term policies that have no cash value and the trust is funded once the insured dies and the proceeds are paid out.
I have seen a number of times when a people created a revocable trust and never funded it. After their death, the pour over will dump all of the probate assets into the trust. I never really understood why someone would do that since it defeats one of the biggest benefits that revocable living trusts offer, namely probate avoidance.
I guess the bigger question that you should ask is why isn't the trust funded? Unless the trust shouldn't be funded or can't be funded, fund the darn thing.
I know that everyone has a trust these days but that doesn't mean that they aren't sophisticated estate planning devises. If you went through the time and money to create a trust, why not take full advantage of all of the benefits it offers. Remember that the trust can only exert control over assets that it owns. If it's not in the trust, the trust can't control the asset.
If you discover that a trust that should be funded isn't, fund it. Funding the trust is pretty easy if the Settlor is alive and able to do it himself. It's going to require visits to the bank and phone calls to the broker, but it's really not that difficult. It just requires a little time and effort.
If the Settlor is alive but isn't able to complete the funding himself, hopefully there is someone who has the authority to do it for him. Usually that person is the attorney, in fact, appointed in a power of attorney.
If the Settlor has passed away, hopefully there are beneficiary designations and a pour over will to fund the trust. If not, all of that time and effort may have been wasted.
Unfunded trusts aren't completely unheard of. However, if you discover that a trust hasn't been funded, call the attorney to check if that is OK. If it isn't, fund it.
Christopher W. Yugo is an attorney in Crown Point. Chris’ Estate Planning Article appears online every Sunday at www.nwi.com. Address questions to Chris in care of The Times, 601 W. 45th Ave., Munster, IN 46321 or to Chrisyugolaw@gmail.com. Chris’ information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant, or estate-planning specialist.