It's a rather common misconception that trusts are only for the super wealthy, but that couldn't be farther from the truth. Trusts are also utilized by the middle-class as a means to protect and pass on wealth and assets to the loved ones or charities and organizations that matter to them. You'll probably continue to build your assets for years after setting up a trust, so you may want to add more assets to the trust over time. That's usually possible, but whether you can do it personally depends on the kind of trust you set up.
Although assets can be added to trusts using a variety of methods, the specific structure of the trust itself will determine whether or not a non-trustee can contribute to it.
Understanding Revocable Vs. Irrevocable Trusts
Although there are many different kinds of trusts, they fall into one of two broad categories: they're either revocable or irrevocable. Which you choose has a direct effect on whether you can add assets after its creation. Generally, you would serve as trustee after you form a revocable trust. This allows you to sell assets or add new ones. When you create an irrevocable trust, however, you must appoint someone else as trustee, at least if you're going to reap all the legal benefits such a trust offers. In this case, only your trustee can add assets to your trust after you form it – you've given up control.
Funding Your Trust
Adding assets to your trust is called "funding" it, either at the time of its creation or later. Some assets – particularly those that have beneficiary designations – are less appropriate for funding than others. For example, you must personally own certain retirement accounts. You can't transfer them into the name of your trust, although you can name your trust as beneficiary. It can be inconvenient to add your vehicle to your trust, particularly if it's one you drive regularly. You might run into snags with insurance, registration or even auto loans. Life insurance policies can also present difficulties. If you're funding your trust with a policy in order to keep the death benefits from contributing to your taxable estate when you die, you must relinquish control of the policy by placing it in an irrevocable trust to achieve this. If you add a policy to your trust that you already hold, transferring ownership, you must outlive the transfer by at least three years or the Internal Revenue Service will include the benefits in your taxable estate anyway.
Understanding Capital Gains
Another issue arises if you sell assets from your trust in order to fund the purchase of new ones. If you sell your trust's assets for a profit, you can incur capital gains taxes. If your trust is revocable, these gains trickle down to you and you would report them on your personal tax return. If your trust is irrevocable, however, your trust would typically pay taxes on capital gains.
Probate Avoidance Strategies
A major advantage to forming a trust is that trusts avoid probate of your property. Therefore, it may not make sense to add assets that already have beneficiary designations. These bypass probate anyway – they transfer directly to your named beneficiaries without court involvement. If you own assets of significant value, it might be advantageous to transfer these into your trust's ownership so you can avoid associated probate costs, including executor and attorney fees. These are typically based on the overall value of your probate estate.
Funding your revocable trust is often an ongoing process as you buy or acquire new assets. If you neglect to transfer them, they'll be subject to probate when you die. You can create a "pour over" will as a safety net, moving any assets you forgot to transfer during your lifetime into your trust when you die, but this only allows them to pass to beneficiaries you named in your trust documents. A pour over will still requires probate to move forgotten or overlooked assets from your estate to your trust.