California families create a living trust to simplify estate administration and avoid probate. However, a trust oftentimes exists on paper while failing to provide security and stability as intended. The most common reason is an unfunded trust: a trust document that was filed correctly but never properly connected to the assets it was meant to control.
Legally speaking, when assets are not placed into a trust, they are still owned by an individual. That creates a serious probate risk because assets outside a trust must go through a court-supervised probate process after an individual’s death. This process can delay distributions to beneficiaries, increase costs and make personal financial information public.
Another common pitfall is missing assets. A home, bank account, or brokerage account may have been meant for trust protection but never retitled correctly. This mistake occurs when a person sets up a trust by filing the paperwork but forgets to transfer ownership of assets, or when account records listing ownership are not accurately updated by a financial institution.
To minimize the risk of setbacks, estate plans often include a pour-over will to act as a safety net. This type of will directs any assets not already transferred into a trust to “pour over” into it upon a person’s passing. However, those assets may still go through probate before reaching the trust which means the original goal of avoiding probate is only partially achieved.
In short, a properly filed trust document alone isn’t enough to protect estate planning goals. Without proper funding the plan may not function when a family needs it most.
Why it happens
Even a well-prepared estate plan can develop gaps over time. A trust that was funded appropriately at its inception can become incomplete years later if not updated to reflect important life changes.
One issue that is commonplace involves new accounts. After creating a trust an individual may open new bank accounts, investment accounts or retirement accounts but forget to title them in the name of the trust. Those assets may remain separate unless that person intentionally transfers them in at a later date.
Another frequent cause is refinances. During mortgage loan refinancing, lenders sometimes require that real estate be temporarily removed from a trust. After the refinanced loan closes, the property should typically be placed back into the trust. But most homeowners forget to complete that step.
There is also the problem of forgotten property. Over time, a person may acquire additional assets such as rental property, business interests or other types of investments. If these assets are never retitled to the trust they remain outside the estate plan.
Because these changes tend to happen over time, a trust can shift out of alignment with the assets it was meant to manage before a family realizes the impact.
How to repair it
The good news is that most trust funding problems can be fixed. The first step is usually a funding audit: a review of a person’s assets to determine which ones are titled in a trust and which are not.
Once missing items are identified, the next step is retitling the assets properly. This might include changing the ownership of bank accounts, brokerage accounts or business interests so they are held in the name of a trust rather than an individual.
For real estate, solutions may involve preparing and recording corrective deeds that transfer property ownership into a trust. These documents are needed to make sure a trust legally owns the property and that it will be managed and distributed according to the wishes of the trust creator.
Estate plans are not “set it and forget it.” It is best to take a proactive approach by conducting regular reviews. Especially when acquiring new assets or opening new accounts.
If you suspect your trust may be incomplete or if it hasn’t been reviewed in years, our expert San Diego team can help identify issues and implement effective solutions. Contact us today to schedule a trust review and regain peace of mind that your estate plan truly protects your family.