Understanding Trust Funding: Why It Matters and How to Do It Right
When creating a trust, one of the most important—but often overlooked—steps is trust funding. Simply put, trust funding is the process of transferring ownership of your assets into the name of your trust. Without funding, your trust is little more than a stack of legal documents with no actual control over your property. This means your assets may still go through probate, remain inaccessible during your incapacity, or be distributed in ways that do not align with your wishes.
In New Jersey, as in many states, failing to properly fund your trust can completely undermine its purpose. Many people assume that once the trust is signed, the job is done—but the reality is that the trust must be properly "loaded" with your assets in order to function as intended. Think of your trust as a suitcase. You can pack it with instructions on where to go and how to get there, but unless you put your belongings into it, it's not going to serve you when you need it most.
What Types of Assets Should Be Funded into a Trust?
Let’s explore the different types of assets you may want to fund into your trust, and why doing so matters for your estate planning goals:
✅ Real Estate
Why: Real estate is one of the most significant assets that should be transferred into your trust. This includes your primary residence, vacation homes, and investment properties. Transferring real estate into your trust helps avoid probate and ensures that your successor trustee can manage the property without court intervention if you become incapacitated or after your death.
How: In New Jersey, this process typically involves preparing and recording a new deed transferring the property into the name of your trust. It is critical to ensure that this transfer is done correctly to avoid triggering due-on-sale clauses in mortgage agreements or disrupting property tax exemptions.
✅ Bank and Investment Accounts
Why: Financial accounts—such as checking, savings, CDs, and investment accounts—are central to daily living and estate planning. When these accounts are titled in your name alone, they must go through probate to be accessed after your death. By funding these accounts into your trust, you allow your successor trustee to manage them if you become incapacitated, and you avoid probate when you pass away.
How: Work with your bank to retitle accounts in the name of your trust, or consider a POD designation (more on that below). This process can vary depending on the institution, so it’s important to be thorough and ensure that all the correct forms are completed.
✅ Business Interests
Why: If you own a business—whether it’s a sole proprietorship, LLC, or shares in a corporation—transferring your ownership interest into your trust can help maintain continuity in the event of your death or incapacity.
How: For LLCs and closely held corporations, this typically involves updating the operating agreement and reissuing ownership certificates. This allows your successor trustee to step in and manage or transition the business as you direct in your trust. Some businesses, such as franchises or licensed professions, may require third-party consent before transferring to a trust. Always review operating or shareholder agreements.
✅ Life Insurance
Why: Life insurance is often a major part of an estate plan. By naming your trust as the beneficiary of your life insurance policies, the proceeds will be directed according to your trust’s instructions. This is particularly useful if you want to provide for young children, beneficiaries with special needs, or structure how and when money is distributed.
How: To do this, you don’t retitle the policy itself, but rather complete a beneficiary designation form naming the trust as either the primary or contingent beneficiary. This ensures the death benefit bypasses probate and is handled according to your wishes.
✅ Personal Property
Why: Includes valuable or sentimental items that you want to ensure pass to specific individuals. This category includes everything from family heirlooms to furniture, artwork, and jewelry.
How: While you don’t need to retitle these items individually, it’s important to include them in your trust through a general assignment or a personal property memorandum. This step helps prevent disputes among heirs and ensures that your personal belongings are passed on as you intend.
A Common Question: Should I Retitle My Bank Account or Use a POD?
When it comes to financial accounts, many people are unsure whether to retitle the account into the name of the trust or to simply use a Payable-on-Death (POD) designation. Both methods can be used to avoid probate, but they have important differences in how they operate and when they become effective.
Retitling the Account into the Trust
When you retitle a bank or investment account into your trust, you are effectively changing ownership of the account. This means the trust becomes the legal owner of the account, and your successor trustee can access and manage the funds immediately if you become incapacitated or pass away.
This option provides a high level of control and flexibility. For example, if your trust directs that funds should be used for the education of your grandchildren, or that distributions be made over time rather than all at once, those instructions will govern how the funds are managed. Retitling also provides incapacity protection—your successor trustee can step in without the need for a court order, keeping your financial life running smoothly.
However, retitling can require more paperwork and coordination with your financial institution. You may need to submit copies of your trust, fill out internal forms, and update how your statements are delivered. Despite the administrative effort, this approach ensures that your estate plan functions as intended.
Using a POD with an Individual as Beneficiary
A Payable-on-Death (POD) designation allows you to name a person who will receive the funds in your account upon your death. This method avoids probate and is typically very easy to set up—you can usually do it with a simple form at your bank.
The downside of a POD to an individual is that it offers no help during your lifetime or incapacity. If you become incapacitated, the account is frozen until a court-appointed guardian or agent steps in. Additionally, a POD designation does not coordinate with your trust, which can create inconsistencies or disputes—especially in blended families or more complex estate plans.
Using a POD with Your Trust as the Beneficiary
Naming your trust as the POD beneficiary of a bank account is a hybrid approach. It avoids probate like a standard POD, but the funds flow into your trust and are distributed according to its terms. This can be a useful strategy when you want simplicity and probate avoidance, but still want your estate plan to direct how the funds are used.
However, keep in mind that this method only becomes effective upon death. Your trustee cannot access the funds during your lifetime or incapacity. Also, financial institutions may require a copy of your trust or confirmation of its terms when the funds are released, which can sometimes cause administrative delays.
Which Option is Best for You?
There is no one-size-fits-all answer. The decision between retitling and using POD designations depends on your personal circumstances and planning goals. If your priority is comprehensive planning and making things easier for your family during a crisis, retitling into your trust is usually the better option. If you’re primarily concerned with avoiding probate and you’re comfortable with more limited control, POD to the trust may be a reasonable compromise. Be sure to coordinate POD designations with your overall estate plan. If an account with a POD contradicts your trust, the POD usually controls—even if it wasn’t your intention.
❌What Assets Should Not Fund Your Trust?
1. Retirement Accounts (IRA, 401(k), 403(b))
Why not?
These accounts have special tax-deferred status under federal law. Transferring ownership of a retirement account to a trust would be treated as a complete withdrawal, triggering income taxes and possibly penalties.
What to do instead:
You can name your trust as a beneficiary (either primary or contingent) if appropriate, especially if you have minor children, special needs beneficiaries, or want to control how the funds are distributed. Just make sure the trust is properly drafted to receive retirement benefits. The SECURE Act now requires most non-spouse heirs to withdraw the full account within 10 years, so trust language must be carefully structured to avoid unnecessary tax burdens.
2. Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA)
Why not?
You can’t retitle an HSA or FSA into a trust. These are individually owned and tied to the account holder’s health coverage and expenses.
What to do instead:
Name a beneficiary (usually a spouse or child) to inherit any remaining funds upon death.
3. Vehicles (in some cases)
Why not?
In New Jersey, most vehicles don’t need to be in a trust because they can pass through a simplified probate process or be transferred with a small estate affidavit.
What to do instead:
You might still want to transfer classic cars or valuable vehicles into the trust, but for everyday vehicles, it may not be worth the hassle—especially since insurance can be more complicated if the trust is listed as owner.
State-Specific Considerations
In New Jersey, trusts are a powerful tool for avoiding probate and managing incapacity. The state does not require a statutory funding form, but proper documentation—like deeds and account change forms—is essential. Other states, such as California or Texas, may have additional requirements or community property considerations that affect how trust funding should be handled.
Don’t Leave Your Trust Empty
Creating a trust is only the first step. Funding your trust ensures your instructions are followed, your assets are protected, and your loved ones are spared unnecessary stress, delays, and court involvement. A trust without assets is like a car with no gas—it might look great, but it won’t get you where you want to go.
Let’s Fund Your Peace of Mind
At The Law Office of Jeffrey Blair, we don’t just draft trusts—we help make them work. If you're not sure which assets to move or how to get started, schedule a Peace of Mind Session today. We'll walk you through the funding process so your plan works when it matters most.
