The unfunded trust is one of the most common and costly estate planning problems in New Mexico. Families pay an attorney to draft a comprehensive trust document, sign it, file it away, and assume they are protected. Then one of them dies, and the family discovers that nothing was ever transferred into the trust. The house is still in the individual's name. The bank accounts never had their titles changed. The trust document exists, but it controls nothing.
What trust funding actually means
Funding a trust means transferring ownership of your assets into the trust. Different assets are funded in different ways:
Real estate is funded by recording a new deed that transfers the property from your name into the trust's name. In New Mexico, this means preparing and recording a new grant deed or warranty deed with the appropriate county clerk's office.
Bank and investment accounts are funded by retitling the account in the trust's name, or by naming the trust as the payable-on-death beneficiary. This requires contacting each financial institution individually.
Retirement accounts generally should not be titled in the trust's name because doing so can trigger tax consequences. Instead, the trust can be named as a beneficiary, though this requires careful drafting to preserve favorable tax treatment.
Personal property such as vehicles, jewelry, and household items can be addressed through a general assignment of personal property into the trust, or through a pour-over will that captures unfunded assets at death.
The pour-over will and what it does
Most revocable living trust plans include a pour-over will, which captures any assets that were not transferred into the trust during your lifetime and directs them into the trust at death. This is an important safety net, but it does not avoid probate for those assets. A pour-over will still goes through probate. The assets still require court involvement to transfer. The trust receives them eventually, but the process is the same as any other probate proceeding.
The pour-over will is a backstop, not a substitute for proper funding.
