Table of Contents
Background
An article series last year explored some of the conceptual issues that surround the idea of “funding” the estate plan, especially the revocable trust. The central theory and proposal was that we should perhaps lead with funding. For attorneys and non-attorneys alike, this idea can seem too drastic of a change where traditionally the weight of service, compensation, and even standard of practice is weighted towards the creation and execution of documents.
To preface, this is not an indictment of a document-forward or a document-agnostic approach to estate planning. But to set the stage, many of us “know” that there is room for improvement when it comes to funding the revocable trust if and when one is created. Even just framing this as “improvement” might understate the issue. But knowing and doing are not the same, primarily because the process of funding for both estate planners and their clients has remained formless. This is a theme that will emerge throughout this article and series.
That being said, the common pushback to integrating funding is two-fold. One is the belief that the client would not be willing to pay for it. The other is a question of accountability, as taking the lead could mean that the attorney themselves is accepting responsibility and accountability for shepherding the funding process. But before getting swept up into the gut reactions to this idea, it is perhaps helpful to set the stage for what funding is and where it goes wrong. The problem is not always funding, but the relationship between funding and the benefits that promoted for tools such as revocable trusts.
Before jumping in, this is the first in a series of articles where (after painting an abstract picture) we explore practical steps in leading with funding, and how this can be an immense value-add that clients would pay for and which perhaps can assign accountability instead of accepting it. Throughout this series, we will assume that a revocable trust for a single client is being used or that either a joint revocable trust, or separate trusts, are being used for a married couple as part of a joint representation.
Funding, in a Nutshell
To set the stage, all estate plans will be “funded” at some point – at the latest after the death of the client. The problem with delayed funding is two-fold. One, from a timing perspective, this may invoke the probate process for what we defined as probate assets in the prior funding series. Two, it may reveal misalignment between beneficiaries of the revocable trust versus direct beneficiaries of what we termed nonprobate assets.
And funding does not stop there. The probate estate or its equivalent – the revocable trust – each serve as a “parking lot” for assets during a period of post-mortem administration. The assets in them will first fund the liabilities side of the balance sheet by wiping out valid claims, and taxes. Then, net assets and income will be distributed to the named or legally-determined recipients of these assets.
Effectively, this means we have two levels of funding:
Transfers to a revocable trust, either during life or by alignment with transfers (other than by survivorship) taking effect at death; and
Transfers after a property owner’s death from a revocable trust, from a probate estate, or even from a revocable trust by way of the probate estate, to the named heirs and beneficiaries.
A better way to approach funding (that I missed in the entire first article series) is perhaps to call it retitling. After all, a decedent’s death causes a probate estate to be formed for the assets titled in their individual name that are probate assets (or that are nonprobate assets but for which the estate is the beneficiary). Since these assets will have to be retitled out of the decedent’s name eventually, funding in its most basic form is retitling assets (or fractional interests therein) to a revocable trust during the property owner’s life. This could also take the form of changing beneficiary designations. And then, after a decedent’s death and the administration of the estate and/or revocable trust this means retitling assets into the names of the beneficiaries (whether individuals, or trustees of subtrusts for the benefit of such individuals).
This process can be burdensome depending on the types, and number, of assets. But retitling is a process that will eventually happen anyway. In effect, funding or its more sanitary label of “retitling” represents at least a partial pre-administration of the estate. This is important contextually, because a commonly-touted benefit of a revocable trust is that the assets retitled to the trust during life will avoid probate. But the only reason this is a benefit that can be touted is because the retitling is reflective of work that will eventually be performed when the client is deceased anyway. (And as an aside, the “accountability” one might fear for taking ownership of the funding process may nonetheless become unavoidable once probate avoidance as a core benefit is decided upon by the client.)
And the catch here is that the current approach to funding a revocable trust only addresses this first layer of retitling. While this pre-mortem retitling is arguably easier and less time-consuming than probate itself, it does not address the second layer of retitling to conclude administration of the revocable trust after death. And while this second layer is arguably easier and less time-consuming within a revocable trust itself as compared to a probate estate, it nonetheless can come as a surprise as it effectively serves as a private probate. The scope of this private probate gets exacerbated as asset mix, plan complexity, and even required filings for federal/state estate taxes (and even GST tax or portability) come into play. For families who were led to believe that the revocable trust could lead to streamlined administration of a decedent’s final affairs, the level of “streamlining” may not always align with expectations.
Again, this is presented not to judge. It is presented to compare reality to eventuality. It is also presented to scope the accountability layer even further. Often little credence is given to the job to be performed by the immediate successor trustee(s) who will take over the actual administration of the revocable trust itself, as their role often requires cooperation with (or even performance of some of the duties of) the executor.
In other words, probate avoidance is not administration avoidance. It is simply a streamlining of administration. And funding, when truly done effectively, approaches not just the first layer of retitling (settlor to revocable trust) but also the second layer of retitling (revocable trust to beneficiaries, or the trustees named on their behalf for irrevocable subtrusts).
Does this mean the drafting attorney needs to be doing all of the work of retitling in advance? NO! But what it does mean is that perhaps we should be more intentional about a plan for retitling. Many drafting attorneys at least create a skeleton plan for retitling in the first phase, that is usually circulated after the documents are executed. But, it is rare to create this plan on an asset-by-asset basis. Perhaps even more rare is a plan that also addresses the second phase of retitling during administration of the revocable trust.
So how can we explore moving from “funding” to a more comprehensive two-phase plan for retitling? We will explore some initial methodology first, and then jump to the existential tensions in service/compensation and accountability/liability.
Phase 1 Retitling
In an ideal world, the phase 1 retitling plan includes:
The formal name/title for the trust itself;
Each specific asset;
The action (retitle, or change beneficiary designation) for each specific asset; and
The responsible party for each specific action.
If we work backwards, we see that perhaps the most important point here is the responsible party. This has unexpected implications for the client, and attorney (creating the plan), alike. For the client, it helps work that would otherwise be formless become a bit easier to handle because they know who to contact and what to request (as determined within the plan itself). And for the attorney, it means that they do not completely shoulder the burden of accountability. The accountability can be shifted. For example, the attorney (or the client’s attorneys, in general) might “own” retitling for specific assets that require custom drafting such as deeds, assignments of business interests, a bill of sale for tangible personal property, or even a complex beneficiary designation instruction that would accompany a change in beneficiary form. Other professionals like the financial advisor or insurance agent may “own” retitling or beneficiary designation changes for financial assets and life insurance, respectively.
There could also be a hybrid, through which the attorney agrees to collaborate with the client on the appropriate forms. This could include bank accounts, and financial assets not managed by a financial advisor. This is the area where traditionally there has been a lot of pushback, as it often meant dedication of attorney or support staff time to sitting on hold with various call centers only to be stonewalled by a lack of authority to act on a client’s behalf. The thing is, this is again work that would have to be done anyway by the client, or eventually by their executor or trustee after their passing. So as part of the retitling process, the opportunity presented is perhaps to flag assets (especially accounts) for consolidation and liquidation which becomes its own separate value-add.
Note that on an asset-by-asset basis, there are several tax, creditor protection, and even succession options. These issues are covered in last year’s funding series. This series is about action, and assumes that the appropriate legal judgment (and drafting) behind each proposed “action” has taken place. But on that note, we need a way to build a plan. We also need a way to present that plan. Both of these propositions have, in the past, presented inefficiencies. This is where a variety of estate tech tools have popped up to assist with the process. At this point, if you are sick of hearing about AI you are not alone – I, too, have begun to treat the use of AI images and tools as a loss of credibility. But AI can be a solution here to address what is being called the “funding gap,” and I am similarly willing to stake my credibility on the use of an AI tool I have developed to present retitling plans in upcoming articles.
Presenting the Retitling Plan
The earlier you can present the Phase 1 (and perhaps even Phase 2) retitling plan(s), the better. Why? Because the retitling work is often left until after the plan is signed. Clients often have limited bandwidth for completing the estate plan and when presented with the triaging of (1) getting documents signed or (2) ensuring funding takes place, the common standard of practice is to ensure that (1) occurs even if it means sacrificing (2). However, as noted above the limitation on a client’s bandwidth is often related to the formless nature of the plan (and its presentation) itself. When you can put edges on it, that helps inspire action. And while planning is never truly “complete,” the illusion of “complete enough for now” is often what clients desire.
The problem as alluded to above is that where the touted benefits of the plan (especially probate avoidance) are reliant upon at least Phase 1 retitling, lack of funding means the plan cannot truly be complete. Ideally, this means the drafter is upfront from the beginning about the trade-off for probate avoidance – effectively a pre-probating of what would otherwise be the estate by going through the retitling/funding exercise. And perhaps if presented from the beginning and wrapped into the process, this makes it easier to handle especially if retitling ceases to be formless. In other words, while it is feared that a robust funding process would drive away clients who have limited motivation it can actually have the opposite effect.
Of course, this means the drafting attorney and/or support staff must spend more time entering and accounting for assets on an asset-by-asset basis. It also means that the client must spend more time organizing this information up front. But if this organization would have to eventually take place, this friction should not be triaged in favor of hastening the speed of engagement, drafting, and document execution. It also creates more opportunities for service and commensurate compensation outside of drafting, especially in an interactive way. Often a client can recall many of their significant assets from memory and communicate them, so recording this information in the initial meeting(s) can lower friction. Also, receiving this information from any financial advisors (or using an advisor’s information to confirm the accuracy of the assets communicated from the client) can be a vital way to solidify the advisory team.
And if asset information can be collected in real-time, perhaps it also benefits us to work with the client to build the funding plan in real-time on an asset-by-asset basis. As noted above, there are several paths and trade-offs that can come into play such as choices between leaving certain accounts titled in joint tenancy, or exploring whether the spouse should be the primary beneficiary of retirement benefits (with trust as contingent). Again this series is not about repeating the factors behind these choices, other than to note that the choices become an integral part of building the retitling plan and can perhaps be illustrated as options in parallel. But it is in these interactive value-adds that create form and edges around the estate plan that value is truly added. This value-add is also where additional fees can be generated, especially in a tech age where the time spent on drafting documents is being reduced.
What’s Next
At this point, I ask you to take your temperature as an exercise. Does the concept of deepening the conversation around a retitling plan excite you, or does it make you nervous? If the feelings are negative, you are not alone. Change is not fun (to put it lightly), and what this article series is proposing is a change in the standard of practice and service. But much like retitling would eventually have to happen anyway, I am here as the messenger to tell you that the change you fear is happening anyway. The advent of AI and estate tech has already shifted this curve in favor of those who can add value in essentially pre-administering estates and trusts, and it will continue to do so. If change is inevitable, it is up to you to determine when you will adopt it.
But as with clients who find it hard to take action on a formless plan, this article series is dedicated to creating edges that both you and the client can identify with. The problem of procrastination presents common ground for estate planners and clients. The issue becomes trading one form of procrastination for another as part of the traditional “triaging” between document execution and funding as presented above. So if nothing else, I hope this article series serves as a wake-up call not from a standpoint of fear but more from a standpoint of opportunity. Estate planning and death are never easy, but our job is to make them easier.
For those who wish to explore further adoption and changes (and perhaps contribute their own education and expertise on this subject that can vary wildly state-to-state and even vendor to vendor), please subscribe or bookmark this newsletter to stay in the loop on subsequent articles in this series. If you have anything (positive) to contribute, please reach out as well. Coming up, what we will cover next is the broad Phase 1 plan based on asset category by comparing the common approach to how it can be improved. From there, we will build out specific asset variances and explore ways to build and integrate Phase 2 retitling plans.