A dirty little secret in the estate planning community is that a very large percentage of trusts are the legal equivalents of empty vaults—they’re worthless. Imagine someone spending a great deal of time, effort, and money to construct a vault for valuable assets but failing to actually move those assets into the vault. They remain outside the vault and are subject to being stolen or wasted.
Similarly, many people have trusts that are “legally” empty structures because they never moved their assets into their trusts. It’s also quite common for people to have moved assets into their trusts but then to have sold one house and bought another but didn’t move their new home into the trust. We see this same thing happen with bank accounts, investment accounts, retirement accounts, and all other types of assets. Either such property items were never put into the trust in the first place, or after time, some assets had been replaced with new assets that weren’t moved into the trust and remain “exposed” and unprotected. This happens for many reasons, but there are some very common reasons for this state of affairs.
Some clients will ask their estate planning attorneys to do things in the “least expensive” manner (“Give me the cheapest option available”) or will shop around for the least expensive price for their estate plan. These clients can easily end up with a “shell” estate plan—an attorney has constructed and instituted the trust but left the asset funding process to the client. The attorney will typically give the client a detailed letter explaining that the client must then “finish the job” by moving assets into the trust. The attorney will even give the client an “instruction” paper that will explain how the client should go about doing these things. The client will normally commit to finishing the task, sign the papers, and leave the attorney’s office with the new estate planning papers. Sometimes, the client will complete the assigned “homework,” but most of the time, the homework remains undone and the trust is then incomplete and worthless (think of that secure, strong safe but with nothing in it).
This is yet another very important reason to have your estate plan reviewed by a competent estate planning attorney every three to five years. The status of assets in or not in the trust is the first question we always look into and discuss with clients when we review existing trusts. From our experience, up to 80 percent of the trusts we review are either partially or totally empty—meaning most or all of the assets that the clients were expecting to protect remain unprotected.
Here’s another personal experience from my law practice. Some time ago, an affluent married couple came into my office for a consultation. They had attended one of my estate planning seminars during which I discussed estate planning basics and the pros and cons of revocable living trusts and so forth. They presented me with their existing estate planning documents, which were several years old. They told me that I’d been “preaching to the choir” at the seminar, that they understood and believed in the things we had discussed as evidenced by their existing estate planning documents.
This couple had indeed updated their documents several times over the years to account for changes in the law and family circumstances. Their purpose in coming to see me was simply to have me verify what they were sure they already knew—that they were in good shape.
I opened their binder of estate planning papers and saw right up front a letter from the attorney who had written (and subsequently updated) their estate plan. The letter directly explained to the couple that the attorney had set up the legal structure of their living trust but had not put any of their assets into the trust. This couple was left with the “unfinished business” of getting their property into the trust.
I glanced up from the letter and asked the couple a simple question. “So, did you ever finish your ‘homework?’”
They looked at me with confused expressions. I asked them if they had done as their attorney had instructed them many years prior to actually get their many varied assets transferred into their trust. Husband and wife were silent. They turned to each other. I’d been married for over sixteen years at that point, and I knew the silent messages being conveyed. Each spouse was under the impression that it had been the job of the other to complete this very important task. They were both more than a little frustrated with the other that the work had never been done. They turned to me and acknowledged that neither had completed the asset funding. They asked, somewhat apprehensively, what that meant.1
I paused, thinking that perhaps a little humor might help lighten the mood, which was at that time anything but light. I told them there was good news and bad news. The good news, I said, was that for years they had slept well at night, fully believing their estate plan was complete and comprehensive and had been protecting their assets and would have provided for an orderly distribution when and as needed. The had enjoyed peace of mind because of what they assumed to be the reality of their situation.
I paused before I broke the bad news. I told them that in spite of what they had assumed, their empty trust had provided them no protection whatsoever. None. Zero. I was quick to add (before such devastating news totally overwhelmed them) that there was still additional “good news” I could impart—perhaps the best possible news. Both husband and wife were still living and healthy and had, thankfully and fortunately, avoided each of the possible unfortunate events that very well could have descended on them, their assets, and their family during those years. They had been very lucky, and they still had the opportunity to authorize me to help them do what should have been done so many years prior, finally getting their many very valuable assets into their trust.
I’m glad to report that we did just that not long after that meeting. Today, their estate plan is in great condition and all their assets are protected by it.
If you have a trust, it’s highly likely that your trust is only partially funded or not funded at all. If that’s the case, your estate plan is nothing more than a very expensive stack of papers in a fancy binder—in other words, worthless! The happy news is that if you’re reading this, you’re probably not dead or disabled, and we can therefore likely fix your problem.
Please note that getting various assets into your trust requires much more than just writing on a piece of paper that you want that asset to be in your trust. The legally mandated processes for real estate, bank accounts, investments, retirement accounts, life insurance, annuities, and other assets are all different. If you don’t do it correctly, each asset remains outside of your trust and unprotected. This is yet another reason why “do it yourself” estate planning is almost always a bad idea. Further, just because you have an “exhibit” at the back of your trust agreement that lists some assets does not mean those assets were actually transferred into your trust. Rather, this “exhibit” or “schedule” is only an inventory of assets. Without the legally compliant transfer and other “trust funding” documents that have been properly prepared and executed (and in some instances recorded with the proper government authority), the assets will remain outside your trust and unprotected, notwithstanding the fact that such assets are listed on an “exhibit” in your binder.
Again, this is somewhat akin to having a contractor build you a fancy house but come back and say, “For what you paid me, I was able to build only the walls of the house. You need to finish the job and put the roof on.” As noted earlier, this is sometimes because the client specifically asked for the “cheapest” alternative. At other times, it’s because the attorney simply doesn’t want to bother with the extra work and hassle of putting assets into the trust, telling himself/herself, “The client won’t pay for that anyway.” Whatever the reason, the reality remains that a shockingly high number of trusts are totally or partially unfunded—the assets that such trusts were designed to protect remain sitting outside of the trust, totally unprotected. It is not an overstatement to say that a trust that is empty is worthless!
In short, it was a silent but nonetheless very intense “blame game” going back and forth in a way that can happen only with a married couple who have spent most of a lifetime together.