Checklist for Properly Funding an Irrevocable Trust

Establishing an irrevocable trust is a powerful estate planning strategy that offers benefits such as asset protection, tax efficiency, and Medicaid planning. However, simply creating the trust is not enough-properly funding the trust is crucial to ensure its legal and financial effectiveness. Improperly funded trusts may fail to serve their intended purpose, leaving assets exposed to probate or estate taxes.

This checklist will guide you through the essential steps to properly fund an irrevocable trust and avoid common pitfalls.

For legal assistance with trust funding, contact us by filling out our online form or calling 414-253-8500 (Heritage Law Office).

1. Confirm the Trust Is Legally Executed

Before transferring assets into an irrevocable trust, ensure that:

The trust document is signed and notarized.
A trustee has been appointed and has accepted their role.
The trust includes the proper provisions for asset management, distribution, and tax planning.

A properly executed trust is the foundation of a successful funding process.

2. Obtain a Tax Identification Number (EIN) for the Trust

Since an irrevocable trust is a separate legal entity, it requires its own Employer Identification Number (EIN) from the IRS for tax reporting. This is essential because:

The trust will file its own tax returns.
Financial institutions require an EIN to open accounts or transfer assets.

You can apply for an EIN through the IRS website or consult an attorney for assistance.

3. Open a Trust Bank Account (If Necessary)

If the trust will hold cash assets, a trust bank account should be established using the EIN. This account is useful for:

Managing liquid assets within the trust.
Receiving income generated by trust-owned assets.
Disbursing funds to beneficiaries according to the trust terms.

Consult with your attorney to determine if a dedicated trust account is required.

4. Transfer Real Estate into the Trust

Real estate is a significant asset often placed in irrevocable trusts. To transfer real property:

Draft a new deed transferring ownership from the individual(s) to the trust.
Record the deed with the local county recorder's office.
Update insurance policies to reflect the trust as the owner.
Confirm mortgage lender approval (if applicable) to avoid triggering a due-on-sale clause.

Failing to transfer real estate correctly could result in probate issues or loss of legal protections.

5. Reassign Ownership of Financial Accounts

Certain financial accounts can be transferred into an irrevocable trust, such as:

Bank accounts (checking, savings, CDs)
Brokerage and investment accounts
Mutual funds

To complete the transfer:

Contact the financial institution to update account ownership.
Provide a copy of the trust agreement or certification of trust.
Update beneficiary designations as needed.

Some accounts may not be suitable for transfer due to tax implications, so consult an attorney or financial advisor before proceeding.

6. Re-title Business Interests to the Trust

If you own a business, transferring ownership interests into an irrevocable trust can help with succession planning and asset protection. Steps include:

For LLCs and corporations: Amend the operating agreement or shareholder records to reflect the trust as the new owner.
For sole proprietorships: Transfer assets used in the business into the trust.
For partnerships: Review the partnership agreement for any transfer restrictions.

Properly retitling business interests ensures continuity and avoids probate.

7. Assign Life Insurance Policies to the Trust

Life insurance proceeds can be used to provide liquidity for estate taxes, debts, or beneficiary support. To transfer life insurance into an irrevocable trust:

Update ownership of the policy to the trust.
Change the beneficiary designation to the trust.
Be aware of the three-year lookback rule-if the insured dies within three years of transferring the policy, it may still be included in the taxable estate.

An Irrevocable Life Insurance Trust (ILIT) may be a better option for managing life insurance policies separately.

8. Transfer Personal Property and Valuables

High-value assets such as jewelry, artwork, collectibles, and vehicles can be placed into an irrevocable trust by:

Creating a Bill of Sale or assignment document.
Updating titles and registrations (for vehicles, boats, etc.).
Obtaining appraisals for high-value items to establish fair market value.

Proper documentation prevents disputes over ownership and ensures the trust retains control over these assets.

Common Assets and Their Transfer Methods

Asset Type	Transfer Method	Considerations
Real Estate	New deed transferring ownership to the trust	Requires notarization and recording with the county
Bank Accounts	Change account ownership to the trust	Some banks may require a trust certification
Brokerage Accounts	Update account title to reflect trust ownership	May require additional forms from financial institutions
Life Insurance	Change policy owner and beneficiary to the trust	Subject to the three-year lookback rule for estate tax purposes
Business Interests	Amend operating agreement or shareholder records	Partnership agreements may restrict transfers
Personal Property	Use a Bill of Sale or assignment document	Items of significant value may require appraisals
Retirement Accounts (401k, IRA)	Name trust as contingent beneficiary	Direct transfers could trigger immediate taxation
Vehicles	Retitle in the trust's name if state law allows	Some states do not permit vehicle ownership by trusts

9. Update Beneficiary Designations on Retirement Accounts

Certain assets, such as 401(k)s, IRAs, and annuities, typically should not be transferred directly into an irrevocable trust due to tax consequences. Instead:

Consider naming the trust as a contingent beneficiary rather than transferring ownership.
Work with an estate planning attorney to evaluate potential tax implications.

Incorrectly transferring retirement accounts could trigger immediate taxation of the entire balance.

10. Review and Maintain the Trust Annually

Once the trust is funded, ongoing maintenance is necessary:

Conduct an annual review to ensure all assets remain properly titled.
Update trust documents if financial situations, tax laws, or estate goals change.
Ensure the trustee is actively managing the trust assets according to legal and fiduciary duties.

A poorly maintained trust can lead to legal disputes, tax issues, or loss of intended benefits.

Contact an Attorney for Irrevocable Trust Funding Assistance

Properly funding an irrevocable trust is a critical step in ensuring it serves its intended purpose, whether for asset protection, Medicaid planning, or estate tax reduction. Mistakes in funding can undermine the effectiveness of the trust, leading to unnecessary legal and financial complications.

At Heritage Law Office, we help individuals and families properly establish and fund their irrevocable trusts to safeguard their legacies. Contact us at 414-253-8500 or schedule a consultation to discuss your estate planning needs.

Frequently Asked Questions (FAQs)

1. What happens if I don't properly fund my irrevocable trust?

If an irrevocable trust is not properly funded, assets intended to be protected by the trust may remain in your personal estate. This means they could be subject to probate, estate taxes, or creditor claims. Additionally, improperly funded trusts may not provide the intended benefits, such as Medicaid eligibility or asset protection.

2. Can I transfer my retirement accounts into an irrevocable trust?

Generally, retirement accounts like IRAs and 401(k)s should not be transferred directly into an irrevocable trust, as doing so could trigger immediate taxation of the entire account balance. Instead, you may consider naming the trust as a contingent beneficiary to control distributions while minimizing tax consequences. Consulting with an estate planning attorney is crucial before making any decisions regarding retirement accounts.

3. How long does it take to fund an irrevocable trust?

The time required to fund an irrevocable trust depends on the types of assets involved. Transferring bank accounts or investment accounts may take a few weeks, while real estate transfers require deed preparation, recording, and lender approval, which can take several months. Life insurance assignments and business ownership transfers may also involve additional paperwork and waiting periods.

4. Do I need to update my trust if I acquire new assets?

Yes. If you acquire new assets that you want protected by the irrevocable trust, you must formally transfer ownership to the trust. Failure to do so could result in those assets going through probate or being exposed to creditors. Regular trust reviews with an estate planning attorney can ensure all assets remain properly titled.

5. Can I remove assets from an irrevocable trust after they have been transferred?

In most cases, assets transferred into an irrevocable trust cannot be removed or revoked, as the trust is designed to be permanent. However, depending on the trust structure and state laws, some strategies-such as decanting or court modifications-may allow limited adjustments. Always consult an attorney before attempting to make changes to an irrevocable trust.