Trust Funding in Florida

Creating a revocable living trust is one of the most effective estate planning strategies available to Florida residents, but the trust only works if it is properly funded. Trust funding is the process of transferring ownership of your assets from your individual name into the name of your trust. Without funding, a trust is an empty legal document that cannot avoid probate, manage assets during incapacity, or distribute property to your beneficiaries as intended. At the Law Offices of Albert Goodwin, PA, we assist clients throughout South Florida with every aspect of trust funding to ensure their estate plans function as designed.

Why Trust Funding Matters

The single most common reason that trust-based estate plans fail is inadequate funding. When a person creates a revocable trust but fails to transfer their assets into the trust, those assets remain titled in the individual's name. When that person dies, the individually titled assets do not pass through the trust. Instead, they must go through the Florida probate process, which is exactly what the trust was designed to avoid. The trust document may contain detailed distribution instructions, but those instructions are meaningless for assets that were never transferred into the trust.

An unfunded or partially funded trust creates additional complications. The family may need to open a probate case to transfer the unfunded assets into the trust through a pour-over will, which adds time, expense, and court involvement. In some cases, if the total value of the unfunded assets is significant, a full formal administration may be required, with all the associated statutory attorney and personal representative fees. The irony is that the family pays both the cost of creating the trust and the cost of probating the assets that should have been in the trust.

Transferring Real Estate to a Trust

Real property is one of the most important assets to transfer into a revocable trust, and it is also one of the most commonly overlooked. In Florida, real property must be transferred by deed. The grantor signs a deed transferring the property from their individual name to themselves as trustee of their revocable trust. The deed is then recorded in the official records of the county where the property is located.

The most common types of deeds used for this purpose are quit claim deeds and special warranty deeds. A quit claim deed transfers whatever interest the grantor has in the property without making any warranties about the title. A special warranty deed provides a limited warranty that the grantor has not done anything to impair the title during the period of their ownership. Either type of deed is generally acceptable for transferring property into a revocable trust, since the grantor is transferring the property to themselves in their capacity as trustee.

Under Florida Statutes § 201.02(7)(b), the transfer of real property to a revocable trust is exempt from documentary stamp tax, provided the transfer is between the grantor and the trustee of the grantor's revocable trust and there is no consideration other than the assumption of an existing mortgage. This means the transfer does not trigger additional transfer taxes, which is an important practical consideration.

If the property has a mortgage, the grantor should review the mortgage documents to determine whether a transfer to a trust triggers a due-on-sale clause. Under the federal Garn-St. Germain Depository Institutions Act (12 U.S.C. § 1701j-3), a lender generally cannot enforce a due-on-sale clause when a borrower transfers residential property to a revocable trust in which the borrower is a beneficiary. However, it is prudent to notify the lender of the transfer and confirm that the transfer will not affect the mortgage terms or the borrower's insurance coverage.

For Florida homestead property, transferring the homestead to a revocable trust does not affect the homestead exemption from creditors or the homestead property tax exemption, provided the grantor continues to reside on the property and the trust terms are consistent with the homestead protection requirements of the Florida Constitution.

Transferring Bank Accounts to a Trust

Bank accounts, including checking accounts, savings accounts, money market accounts, and certificates of deposit, must be retitled in the name of the trust. This typically involves visiting the bank, providing a copy of the trust agreement or a certificate of trust, and completing the bank's paperwork to change the account title. The new account title will generally be in the form of "[Grantor's Name], as Trustee of the [Trust Name], dated [Date]."

Some banks will retitle the existing account, while others require the grantor to close the existing account and open a new account in the name of the trust. In either case, the grantor should update any automatic deposits, automatic payments, and linked accounts to reflect the new account information. A certificate of trust, authorized under Florida Statutes § 736.1017, is a shortened document that provides the bank with the essential information it needs (the trust name, date, trustee identity, and trustee powers) without requiring disclosure of the full trust agreement, including the distribution provisions and beneficiary designations.

Transferring Investment and Brokerage Accounts

Investment accounts, brokerage accounts, and mutual fund accounts must also be retitled in the name of the trust. The process is similar to bank accounts: the grantor contacts the financial institution, provides the trust documentation, and completes the institution's forms to retitle the account. Most major brokerage firms have established procedures for this process and can complete the retitling relatively quickly.

Stocks and bonds held in a brokerage account are retitled when the account itself is retitled. However, if the grantor holds physical stock certificates (which is uncommon today), those certificates must be re-registered in the name of the trust through the company's transfer agent. For U.S. savings bonds, the process involves reissuing the bonds in the name of the trust through the U.S. Treasury.

Life Insurance Policies

Life insurance can be incorporated into a trust-based estate plan in several ways. For a basic revocable trust, the grantor typically changes the beneficiary designation on their life insurance policy to name the trust as the beneficiary. This means that when the grantor dies, the insurance proceeds are paid directly to the trust and distributed according to the trust terms. This approach is preferable to naming individual beneficiaries on the policy, because it ensures that the proceeds are distributed according to the trust's comprehensive distribution plan rather than a simple beneficiary designation.

If the grantor wants to remove the life insurance proceeds from their taxable estate, they may instead create an irrevocable life insurance trust (ILIT) and transfer ownership of the policy to the ILIT. In that case, the ILIT, rather than the revocable trust, owns the policy and receives the proceeds. This is a distinct planning technique with its own funding requirements, including the need to make annual gifts to the ILIT to pay the premiums.

Retirement Accounts

Retirement accounts, including IRAs, 401(k)s, 403(b)s, and other qualified plans, require special consideration in trust funding. Unlike other assets, retirement accounts should generally not be retitled in the name of a revocable trust during the grantor's lifetime. Transferring ownership of a retirement account to a trust is treated as a distribution for tax purposes, which would trigger immediate income tax on the entire account balance and potentially a 10% early withdrawal penalty if the grantor is under age 59½.

Instead, the grantor can name the trust as the beneficiary of the retirement account. This ensures that the retirement account proceeds are paid to the trust upon the grantor's death and distributed according to the trust terms. However, naming a trust as the beneficiary of a retirement account has significant income tax implications, particularly under the SECURE Act, which eliminated the stretch IRA for most non-spouse beneficiaries and requires that inherited retirement account funds be distributed within 10 years of the account owner's death. Careful drafting is required to ensure that the trust qualifies as a "see-through" trust so that the beneficiaries' individual life expectancies or the 10-year rule can be applied, rather than the less favorable five-year distribution rule.

Business Interests

If the grantor owns an interest in a business entity, such as a limited liability company, a corporation, or a partnership, that interest should be transferred to the trust. For LLC membership interests, this typically involves an assignment of membership interest from the grantor to the trustee of the trust, along with an amendment to the LLC's operating agreement to reflect the change in membership. For corporate stock, the grantor transfers the shares to the trustee and the transfer is recorded in the corporation's stock ledger. For partnership interests, the grantor assigns the partnership interest to the trustee and the partnership agreement is amended accordingly.

Before transferring business interests to a trust, the grantor should review the governing documents of the business entity. Many operating agreements, shareholder agreements, and partnership agreements contain provisions that restrict or require consent for transfers of ownership interests. The grantor should ensure that the transfer to the trust complies with these provisions or obtain the necessary consents from the other owners.

Vehicles and Tangible Personal Property

Motor vehicles can be retitled in the name of a trust by completing the appropriate paperwork with the Florida Department of Highway Safety and Motor Vehicles. However, some practitioners advise against retitling vehicles in a trust because of the practical complications it can create with auto insurance and because vehicles typically pass through a summary administration or through the surviving spouse's rights without significant probate expense. For high-value vehicles, collectible cars, or vehicles owned by single individuals, retitling in the trust may be worthwhile.

Tangible personal property such as furniture, jewelry, art, and collectibles can be transferred to a trust through a general assignment of personal property, which is a written document signed by the grantor that assigns all of the grantor's tangible personal property to the trustee of the trust. This assignment is typically prepared as part of the trust-based estate plan and ensures that personal property passes through the trust without the need for probate.

Assets That Should Not Be Transferred to a Trust

Certain assets should not be transferred to a revocable trust, or require special handling. As noted above, retirement accounts should not be retitled in the name of the trust during the grantor's lifetime. Health savings accounts (HSAs) also cannot be owned by a trust. S corporation stock requires careful analysis, because a revocable trust can hold S corporation stock during the grantor's lifetime, but certain types of irrevocable trusts may not qualify as eligible S corporation shareholders. Any asset that involves professional licensing, regulatory approvals, or contractual restrictions should be reviewed carefully before transfer.

Maintaining Trust Funding Over Time

Trust funding is not a one-time event. After the initial funding of the trust, the grantor must remember to title all newly acquired assets in the name of the trust. If the grantor purchases a new home, opens a new bank account, or acquires new investments, those assets should be titled in the trust from the beginning. Many people create a trust and fund it initially but then acquire new assets in their individual name over the years, gradually undermining the effectiveness of their estate plan.

Periodic reviews of trust funding, ideally as part of an annual estate plan review, can identify any assets that have fallen outside the trust and need to be retitled. This ongoing maintenance is essential to ensuring that the trust continues to achieve its purpose of avoiding probate and providing seamless asset management.

Contact a Florida Trust Funding Attorney

Proper trust funding is the difference between an estate plan that works and one that fails. At the Law Offices of Albert Goodwin, PA, we do not simply draft trust documents and hand them to our clients. We guide our clients through the entire funding process to ensure that every asset is properly titled and that the trust will function as intended. We serve clients throughout Miami-Dade County, Broward County, and Palm Beach County from our office at 121 Alhambra Plz #1000, Coral Gables, FL 33134. Call us at 786-522-1411 or email [email protected] to schedule a consultation and make sure your trust is properly funded.