Creating and funding a trust

What a trust needs to exist

Almost every state has adopted the Uniform Trust Code's requirements, and where they have, the list is the same to the word. Arizona, Illinois, Ohio and Virginia all say a trust is created only if all five hold.

1. The settlor has capacity to create a trust.
2. The settlor indicates an intention to create it.
3. It has a definite beneficiary — or is a charitable trust, a trust for the care of an animal, or a trust for a non-charitable purpose.
4. The trustee has duties to perform.
5. The same person is not the sole trustee and the sole beneficiary.

Nothing on that list is money. Ohio makes the consequence explicit: a trust is valid regardless of the existence, size, or character of the corpus of the trust. A trust with nothing in it is a real trust that controls nothing, which is a frequent failure in an otherwise finished plan.

The fifth requirement worries people who intend to be their own trustee and their own beneficiary, which is the ordinary shape of a revocable living trust. It should not: naming a successor beneficiary satisfies it. Ohio removes the objection in terms, providing that such a trust is not invalid where one or more other persons hold a vested, contingent, or expectant interest, and that no merger of the legal and equitable titles occurs.

Why the document is the easy half

A trust controls what it owns. Until the deed to the house has been re-recorded in the trust's name and the accounts retitled, everything is still owned personally, and everything still passes the way it would have without the trust — which usually means probate, the thing the trust was made to avoid.

The gap is rarely deliberate. It opens because funding is a list of separate errands with no deadline attached to any of them, and because accounts opened after the trust was signed are opened in a personal name by default.

How each kind of asset is actually moved

Three different mechanisms, and using the wrong one is where the expensive mistakes are. Nothing here is instant and none of it happens by mentioning the asset in the trust document.

What stays outside on purpose

Not everything belongs in a trust, and a plan that moves everything is as wrong as one that moves nothing. Three categories are usually left out deliberately.

• Retirement accounts, because retitling one is a taxable distribution. Where the trust should benefit, it is named as beneficiary instead — a decision with real tax consequences either way.
• A day-to-day current account, because the friction of running ordinary spending through a trust account outweighs avoiding probate on a small balance that a beneficiary designation can handle anyway.
• Anything already passing outside probate by another route — a joint tenancy with survivorship, a transfer-on-death deed, a payable-on-death account. Moving these into a trust changes who inherits, which is sometimes the intention and is often an accident.

Where an asset is left outside, the beneficiary designation on it becomes the operative instruction and it overrides the trust. A form completed at a job in 1998 outranks a trust signed last year.

When the person can no longer sign

The first requirement is capacity in the settlor, which raises the question a family asks at exactly the wrong moment: can somebody set a trust up for a parent who can no longer do it themselves? The four states Sahvelo has read answer it in four different ways, and the difference is not a detail — in one of them the answer depends on what a power of attorney signed years earlier happens to say.

Wherever the answer runs through a power of attorney, the power has to authorize it before capacity is lost. That is a document to check now rather than a route to rely on later.

What this costs, and when a lawyer is the answer

Sahvelo does not draft documents and does not sell them. What is worth saying is where the money actually goes and which situations are not do-it-yourself, both of which are judgment rather than law.

• The drafting is a fixed, one-off cost. The funding is mostly free — a recording fee at the county, and paperwork at each institution — and mostly your own time.
• A trust bought and never funded costs the full price and delivers nothing, which makes funding the highest-return hour in the whole exercise.
• Get help where a beneficiary receives means-tested benefits, where there is property in more than one state, where a business interest is involved, where a blended family means the trust has to hold competing claims, or where the estate is large enough for federal estate tax to be live.

If a trust already exists and nobody is sure what is in it, that is the thing to establish first. It is answerable in an afternoon from the deed, the account statements and the trust document, and it decides whether anything else needs doing at all.