The expression, “the elephant in the room”, refers to an enormous topic that never gets discussed. The giant elephant lingers in the background and is overlooked. In the context of estate planning, there is a similar “elephant in the room”. It’s called “the unfunded estate plan”. If left incomplete, this last critical step can result in serious and unintended consequences.

What Is An Unfunded Estate Plan?

An unfunded estate plan means that the assets specified in a trust document are never actually retitled into the name of the trust. Estate planning documents may be signed and notarized. However, the estate planning process is not complete until assets are retitled into the name of the trust; so that your assets will pass exactly as you have specified in your trust documents.

Quite often, clients with an estate plan believe that their Last Will and Testament will handle everything they own. However, a will only controls assets titled in an individual name. On the other hand, trust instructions only apply to assets that are titled in the name of the trust and its trustees.

When your estate planning attorney speaks of “funding your trust,” he or she is talking about changing the title to assets which may currently be owned individually, in joint tenancy, or controlled by contract, into the name of your living trust. The act of retitling assets is called “funding.”

What Happens If I have An Unfunded Estate Plan?

After you pass away, if you have an unfunded estate plan, your trustee may be unable to legally manage your assets; your estate can end up in probate, along with unexpected taxes and fees; and your assets may not go to their intended beneficiaries. For these reasons, it is critical that your trust to be properly funded.

If any asset is overlooked, or if you pass away before a recently acquired asset can be properly funded, most estate plans will include a safety net called a “pour over will.” This is a special will with the primary function of “pouring” mistitled assets into the trust or other planning entity where they belong.

A “pour over will” should only be used as a last resort because, like any other will, the “pour over will” is required to go through the probate process. Among other reasons, one intent of a trust is to avoid probate. An unfunded trust can result in your Executor being under the supervision of a probate court to obtain permission to administer your trust.

In addition, even a “pour over will” will not help with assets that are controlled by contract, or are owned in joint tenancy at the time of death. If something is titled incorrectly, it will remain outside the control of the estate plan. That asset usually will not pass to your beneficiaries according to the provisions of your estate plan.

Finally, if you become mentally incapacitated, and your trust has not been funded, other unintended consequences can occur. Your family members, or other appointed persons, may end up becoming your court ordered guardians to establish your care and living arrangements. Similarly, a court appointed conservator may need to manage your property and financial affairs.

How Do I Know If My Estate Is Properly Funded?

As we are learning, one of the biggest mistakes made in the estate planning process is spending a lot of time and money creating great documents, but then failing to complete the funding process.

In next month’s newsletter, we will review the kinds of assets that get funded, and some of the recommended approaches for how to fund your estate plan. As always, it is important to contact us to help you review these issues to make sure that your estate plan funding is done correctly.