The BIGGEST Mistake People Make When Setting Up a Trust

Your trust is probably worthless right now. That's right - even if you paid top dollar for the perfect estate plan, there's a good chance your assets remain completely unprotected because of one critical step most people miss: funding the trust correctly.

Too many families find out too late that their trust didn’t actually protect anything because their assets were never properly transferred into the trust in the first place. This oversight often leads to exactly what the trust was designed to avoid - probate, exposed assets, taxes, and family conflicts.

Today, I'll share with you exactly how to fund your trust the right way - so your wealth is truly protected not just on paper, but when your family needs it most.

Why Trust Funding Matters

Let's start with what funding a trust actually means, because there's a lot of confusion here.

Funding your trust simply means transferring ownership of your assets from your personal name to the name of your trust.

It's like changing the name on the title of your car or house. If you don't change that title, the trust doesn't own anything - which means it can't protect anything.

I've seen this confusion with several clients who believe their estate plan is complete once they sign their trust documents. One client was shocked to learn that her trust offered far less protection than expected because not all her assets were transferred into it. We had to start the funding process immediately to ensure her estate plan would actually work as intended.

This is why I ask all my clients a simple question to help them understand: "If your trust document burned in a fire tomorrow, which of your assets would still be protected?"

Most people look stunned because they realize the answer is "none of them." The document itself isn't what protects you - it's the proper retitling of your assets that matters.

Think of a trust like a sophisticated safety deposit box. You can pay for the box, you can get the key, but if you never actually put your valuables inside, they remain exposed and unprotected. That's exactly what happens with an unfunded trust.

Without proper funding, your trust is just an expensive pile of paper. Here's what happens when you don't fund your trust correctly:

• Your assets still go through probate - the exact thing your trust was designed to avoid

• Your assets remain vulnerable to creditors and lawsuits

• If you become incapacitated, your family might need court approval to manage your assets

• Any specific instructions in your trust about who gets what become meaningless

The Trust Funding Process Explained

Now let's talk about how to actually fund your trust. There are three main methods:

First is retitling assets. This means changing the name on the ownership documents from "Jane Smith" to "Jane Smith, Trustee of the Smith Trust dated January 1, 2025." This applies to real estate, vehicles, investment accounts, and bank accounts.

Second is changing beneficiary designations. Some assets like life insurance, retirement accounts, and annuities pass by beneficiary designation rather than title. For these, you can name your trust as a primary or contingent beneficiary.

Third is assignment. For personal property without formal titles - things like furniture, jewelry, or artwork - you can use an Assignment of Tangible Assets document to transfer ownership to your trust.

Think of funding your trust like moving to a new house. Some items you physically relocate. Others you transfer by changing the name on the account. And for some things, you simply need to tell people your new address. Each asset requires a different approach, but all need to be addressed for the move to be complete.

Let me share an all-too-common scenario: Sarah and Tom created a trust to protect their $2.5 million estate. They transferred their home and investment account, then stopped. Years later, Tom had an accident that left him incapacitated. Sarah discovered their vacation property and several bank accounts weren't in the trust. She had to go to court for permission to use their own money – a process that took months and cost thousands, right when she needed the money most.

One of the biggest misconceptions is that funding a trust is a one-time process. This is absolutely false.

Every time you acquire a new asset, you need to decide whether it belongs in your trust and take steps to transfer it.

I recommend setting a calendar reminder to review your trust funding once a year, around tax time when you're already reviewing financial documents. This simple habit can save your family tremendous headache down the road.

Which Assets Should Be In Your Trust?

Let's talk about which assets should actually be in your trust. This isn't a one-size-fits-all answer, which is why many people get it wrong.

Generally, you want to include:

• Real estate (primary home and investment properties)

• Non-retirement investment accounts

• Bank accounts (checking, savings, CDs)

• Business interests

• Intellectual property

• Valuable personal property (artwork, collectibles, jewelry)

But here's where it gets tricky. There are some assets you typically should NOT put in your trust:

• Retirement accounts (IRAs, 401(k)s, etc.) - these have special tax treatment that can be disrupted if owned by a trust

• Health and medical savings accounts

• Vehicles in some states (due to insurance complications)

• Small, low-value bank accounts you use for everyday expenses

Think of your assets like different types of pets. Some pets (like fish) need to live in water (your trust), while others (like birds) need to stay in air (outside your trust). Putting the wrong pet in the wrong environment can be harmful. Your retirement accounts are like those birds – they need to stay outside the trust to work properly.

One of the most commonly overlooked assets is real estate in other states. Let me share a story about a couple, Michael and Patricia. They owned property in Florida and Colorado. They carefully put their Florida home in their trust but completely forgot about their Colorado vacation cabin. When Patricia passed away, Michael was shocked to learn he needed to open a probate case in Colorado – a state where he had no contacts or attorney relationships. The process took over a year and cost an additional $15,000 in legal fees. Had they transferred both properties to their trust, all of this could have been avoided.

If you own property in multiple states and it's not in your trust, your family may have to go through probate in each of those states - multiplying the cost and complexity.

Another frequently missed asset is business interests. If you own part or all of a business, those ownership interests should typically be transferred to your trust, but this requires special care to ensure you don't violate any operating agreements.

Common Funding Mistakes to Avoid

Next, let's talk about the biggest mistakes people make when funding their trusts.

Mistake 1: Thinking the attorney will handle all the funding.

In reality, most estate planning attorneys will provide instructions, but expect you to do the legwork of contacting banks, investment companies, and county recorder's offices.

It's like hiring an architect to design your dream house. They'll create the blueprints, but they won't build the house for you – you need contractors for that. Similarly, your attorney creates the trust "blueprint," but you're often responsible for the actual "construction" of transferring assets.

Mistake 2: Funding inconsistently.

This happens frequently - someone puts their house in their trust but forgets about their investment accounts or transfers their big accounts but misses smaller ones. Partial funding can be almost as problematic as no funding.

Take Robert, for example. He carefully put his home and main investment account in his trust but forgot about a rental property and several smaller accounts. When he passed away, his family still had to go through probate for those forgotten assets, facing exactly the delays and expenses the trust was meant to avoid.

Mistake 3: The "set it and forget it" approach.

Your trust funding needs to evolve as your assets change. When you buy new property or receive an inheritance, those new assets need to be added to your trust too.

It's like installing a security system in your home but only activating it in certain rooms. You wouldn't leave your valuable jewelry in the one room without security, would you? Yet that's exactly what happens when new assets aren't added to your trust.

Think of your trust like a team—you can’t win the game if half your players are still sitting on the bench.

This is why every trust owner should have a pour-over will as a safety net. A pour-over will "catches" any assets you acquire but forget to transfer to your trust and ensures they'll still be distributed according to your trust's instructions. For example, if you buy a classic car shortly before your passing but don't transfer it to your trust, a pour-over will ensures that car eventually ends up with the right beneficiaries. While these overlooked assets may still go through probate, they'll ultimately be distributed according to your trust's terms rather than state law.

Mistake 4: Mishandling retirement accounts.

As I mentioned earlier, you typically don't want to change the ownership of retirement accounts to your trust. Instead, you might name your trust as a beneficiary, but even this requires careful consideration.

Imagine David, who transferred ownership of his $1.2 million IRA directly to his trust, thinking he was being thorough. What he didn't realize was that this triggered a full distribution of the account – creating a tax bill of over $400,000 that year! Had he simply named his trust as the beneficiary instead of transferring ownership, this disaster could have been avoided.

The key to avoiding these mistakes is having a system.

I recommend creating a simple tracking spreadsheet with three columns: Asset, Current Ownership, and Action Needed. Review this at least annually to ensure nothing falls through the cracks.

Final Thoughts

Remember, a trust is only as good as its funding. A well-drafted but unfunded trust is like an empty safe – impressive looking but ultimately useless at protecting what matters. The simple act of properly transferring your assets into your trust transforms it from a stack of legal documents into a powerful tool that truly protects your legacy and your loved ones.

While these steps can help you properly fund your trust, working with a qualified estate planning attorney who coordinates with your financial advisor ensures your plan truly protects what matters most to you.

If you’re not 100% sure your trust is fully funded, you’re not alone and this is something you don’t want to leave to chance. Feel free to schedule a free Estate Clarity Meeting using the link in the description and we’ll go over your trust funding together and help you catch any gaps that could leave your assets vulnerable.