Unfunded Trusts Can Be Costly

Unfortunately, unfunded revocable trusts are common. The cost can be devastating. Improperly titled assets and or improper beneficiary designations can render tax planning and distributional planning obsolete. You can inadvertently disinherit people. You can make huge mistakes in terms of estate tax planning. Guess what? You can do this even though you hire a lawyer. Mistakes in this arena can be costly. In the past two weeks, my office has seen four cases where assets were not titled properly and or beneficiary designations did not work with the plan. It is absolutely amazing.

You need to make sure your assets are titled properly so they will work with your plan and make sure the beneficiary designations will work as well. The proper funding of trusts and coordination of beneficiary designations on life insurance policies and retirement plans is crucial to the success of your estate plan. You need to insist on clear guidance on this or else it can cost your family dearly.

You would never build a roadway or bridge with no access. By the same token, you should not have an unfunded trust unless that is how your plan works. In some cases, we plan on first passing that all assets will pass via joint tenants with right of survivorship. This form of ownership makes it so the survivor becomes owner automatically by operation of law. Usually, the only thing that is needed to transfer title is to file the death certificate. However, it is more often the case that the plan was inadvertently unfunded and the consequences can be dire.

EXAMPLE: John and Susan are worth 4 million together. John’s IRA is 2 million and Susan owns the house and stock worth 2 million in her trust. Their trust agreements have tax planning built into them. If John’s beneficiary designation on his IRA does not make it so it is possible for the IRA to go into the shelter trust when he passes (if he passes first), then his credit could be wasted. Susan’s credit could be wasted if she owns the stocks and house jointly with John. If either of them waste their credit, then all assets can be exposed to the federal estate tax when the survivor passes. If the credit is 2 million, there would be 2 million of exposure on a 4 million estate (the survivor’s estate). That could cost more than $800,000 in estate taxes alone. Right now, there is uncertainty regarding the estate tax. My guess is that it is not going away.


Contributed by Mark F. Winn, J.D., LL.M. in Estate Planning, who is a local tax, asset protection and estate planning attorney.