Creating a living trust is one of the best financial moves an individual can make. Having a living trust in place can secure your assets, ensure they go to the loved ones you have identified, and help to avoid potentially ugly legal battles in the event of death or incapacity. However, some living trusts include common mistakes that can invalidate or undermine some of the intentions if they aren’t properly addressed. Examples of common mistakes that are encountered include the following examples.
1. Not updating it regularly.
Living trusts often reflect the author’s intentions at a single point in time. However, family situations, legal ties, and financial holdings often change continuously. These changes are further exacerbated in the event that a move out of state or out of the country occurs. Updates to a living trust should be made whenever there is a substantial change in any circumstance that could impact the transfer of benefits, such as a birth, death, marriage or divorce in the family, as well as any relocation, or when tax laws change dramatically. Even in the absence of a substantial change, a living trust should be reviewed and updated at least annually.
2. Failing to Properly Title Assets.
Living trusts control the assets that are put under it; however, it is common for individuals to create a well-thought-out trust, yet not change the titling necessary to add the asset to the trust. Without proper titling and beneficiary designations to the trust itself, the trust cannot protect the asset itself. This mistake is one sure way to ensure that any assets owned outside of the trust will end up in probate court.
3. Selecting the Wrong Trustee.
The role of a trustee is to objectively analyze the circumstances, act in accordance with the trustor’s wishes, and equitably distribute assets. While many people automatically choose one or more of their children to fulfill this role, these individuals have a vested self-interest that may conflict with them fulfilling their duty as a trustee. Be sure that anyone you select has the capacity to truly perform their duty diligently; if you cannot identify someone in your personal life, it may be worth considering an external, professional trustee.
4. Minimizing the Impact of Creditors.
Living trusts do not automatically protect the assets from creditors, particularly if it is a revocable living trust. Because of this limited protection from creditors, it’s crucial to understand how any outstanding debt may impact the assets you have, and what will be available for beneficiaries. And while you can’t protect the assets from your own creditors, with a carefully drafted one, you may be able to protect your trust assets from your spouse’s or children’s creditors.
5. Forgetting About Estate Taxation.
All assets in a living trust are considered part of your gross estate for estate planning tax purposes – even real estate. You will want to calculate all of the assets and determine what the tax liability will be when the assets are transferred; this process will help your estate and beneficiaries avoid the surprise of a large, unexpected tax burden. Carefully crafted estate plans can take these concerns into consideration with local tax laws and help you to identify ways to reduce this tax burden and ensure that more of your assets stay in the hands of loved ones.
6. Why you should use an Estate Planning Professional to Prepare your Living Trust.
It’s incredibly easy to find form trust documents or software packages that can help you create your own living trust. While this might seem like an easy process, they certainly can’t provide the same level of protection that a professional estate planning service can. And the more complex your estate is, the more you can benefit from working with an experienced professional.
If you miss any step in creating your own trust, it can potentially invalidate the entire trust, or result in any number of unintended consequences. Many of the standard trust forms also act much more like a will in that they serve to distribute assets outright to beneficiaries. Many individuals with estate plans understand that lifetime trust for beneficiaries can provide better long-term protection for the assets.
Speaking with a trusted and experienced professional is the best way to understand all of your options and ensure that you have a living trust that serves its purpose.