Why Your Trust Might Not Work: The Critical Step Most People Miss

Every year, families discover that the revocable living trust their loved one paid thousands of dollars to create does not actually work the way they expected. The trust document itself may be well-drafted, but the assets were never transferred into the trust — a critical oversight that sends those assets straight to probate, which is exactly what the trust was designed to avoid.

This problem is so common that it has a name in the estate planning world: an unfunded trust. And it is one of the most expensive mistakes families make.

What Does It Mean to Fund a Trust?

Creating a trust is only the first step. A trust is a legal entity that can own property, but it starts out empty. For the trust to control how your assets are managed and distributed, you must transfer ownership of your assets from your individual name into the name of the trust. This process is called "funding" the trust.

For example, if you own a home in your individual name and you create a revocable living trust, the home does not automatically become part of the trust. You must execute a new deed transferring the property from "John Smith" to "John Smith, Trustee of the John Smith Revocable Living Trust." The same principle applies to bank accounts, investment accounts, and other titled assets.

How to Fund Different Types of Assets

Real Estate

In Pennsylvania, transferring real estate into a trust requires recording a new deed with the county recorder of deeds. The deed must include the full legal description of the property, the name of the trust, and the date the trust was established. One advantage in Pennsylvania is that transfers to a revocable trust are generally exempt from transfer tax under 72 P.S. § 8102-C.3(10), provided the transfer meets the statutory requirements.

However, the transfer must be done correctly. An improperly drafted deed can create title issues that complicate future sales or refinances. We recommend having an attorney prepare the deed to ensure it complies with Pennsylvania recording requirements and preserves the transfer tax exemption.

Bank and Investment Accounts

Most banks and brokerage firms will allow you to retitle accounts into the name of your trust. The process typically involves providing the financial institution with a copy of the trust (or a certification of trust under 20 Pa.C.S. § 7783) and completing their internal paperwork. Some institutions may require specific forms or have their own procedures, so it is worth contacting them in advance.

Retirement Accounts and Life Insurance

Retirement accounts such as IRAs and 401(k)s should generally not be retitled into a trust during your lifetime, as doing so can trigger immediate income tax on the entire account balance. Instead, the trust can be named as the beneficiary of the retirement account. However, this decision should be made carefully because naming a trust as beneficiary can affect the stretch-out period for distributions and may have unintended tax consequences. Life insurance policies can name the trust as beneficiary without adverse tax consequences in most cases.

Personal Property

Tangible personal property — furniture, jewelry, vehicles, art — can be transferred to the trust through an assignment of personal property, which is a simple document that assigns ownership of these items to the trust. For titled property like vehicles, the title should be transferred into the trust name through PennDOT.

What Happens When a Trust Is Not Funded?

If assets remain in your individual name at the time of your death, those assets must go through probate — regardless of whether you have a trust. The trust only controls assets that are titled in the trust name or that name the trust as beneficiary.

This means the family may end up paying for both trust administration and probate, which is more expensive and time-consuming than either one alone. In Pennsylvania, where probate costs for a typical estate run approximately $1,325, the cost of an unfunded trust can be significant: you paid $2,500 to $7,500 to create the trust, and then your estate still goes through probate because the trust was never funded.

The Trust Mill Problem

Many of the national estate planning seminar programs that sell trusts focus on the document itself and give little attention to funding. The attorney may hand you a thick binder of documents and a generic instruction sheet about retitling assets, but the actual work of transferring assets into the trust is left to you. Most people never complete the process, either because they do not understand what is required or because they find the process confusing and time-consuming.

At Ament Law Group, when we determine that a trust is the right solution for a client, we guide them through the entire funding process. We prepare the deeds, coordinate with financial institutions, review beneficiary designations, and verify that every asset is properly titled. The trust is only as effective as its funding, and we treat funding as an essential part of the engagement — not an afterthought.

When Does a Trust Make Sense?

A revocable living trust is not necessary for every family. In Pennsylvania, where probate is relatively straightforward and affordable, many families are better served by a well-drafted will combined with proper beneficiary designations and joint ownership arrangements. A trust may be appropriate when you own real estate in multiple states, have a second marriage or blended family with competing interests, have high net worth requiring estate tax planning, need to provide for a beneficiary with special needs, or want to provide structured distributions to beneficiaries who are young or who have spending concerns.

The key is to work with an attorney who will evaluate your specific situation and recommend the right plan — not one who is incentivized to sell you the most expensive option.

If you have a trust and are not sure whether it is properly funded, or if you are considering whether a trust is right for your situation, contact us at (724) 733-3500 for a review. You can also contact us online.

About the Author

John W. Ament, Esq.

John W. Ament is a partner and co-founder of Ament Law Group, P.C. in Murrysville, PA.