Trusts can be an essential part of any estate plan, but they are complex vehicles. There are many ways they can go wrong. Below are some of the most common errors and how to avoid them.
Properly funding your trust is key, otherwise, your trust has no legal effect. You’ll need to properly transfer assets to be held in the trust’s title, which means filling out and filing all required paperwork.
Failure to designate a successor trustee
Many people appoint themselves as trustees of a living trust. If you do this, however, you also have to designate a successor trustee who’ll step in and manage your trust if you become incapacitated. Don’t leave the successor trustee’s decision for later. Find someone whom you trust to manage your assets the way you’d like it to be done. It may be tempting to go with your oldest child or best friend, but consider the person’s temperament and ability to administer the trust for you. You may want to name multiple co-trustees to manage your assets during your disability or after your death. After all, a beneficiary might be hit with a physical or mental infirmity that could have implications for your estate plan. In some cases, you may want to name a professional trustee — a bank, for example. Having a professional make distribution decisions can be better for family harmony.
Failure to review your trust regularly to keep up with changes
Over the years, your life changes. You might have children or get divorced, and then you find that your asset situation has changed. If that happens, check your trust to make sure it’s kept pace with reality. Also check your trust if you change jobs, if you retire or even if the stock market radically changes. When a tax law is altered, it, too, may affect your trust assets, so pull out the document and make sure it still will do what you want it to. You must ensure that your trust continues to function well and meet all your changing estate planning needs.
Failure to consider creditors
A revocable, or living, trust does not protect the assets in the trust from creditors. However, an irrevocable trust can do so in many cases, if it is properly set up.
Living trusts are powerful planning tools to use to avoid probate and protect your beneficiaries from creditors or a divorcing spouse. With living trusts, you can provide for your family, fund education for your grandchildren and donate to your favorite charities. Sometimes, even a seemingly trivial error can have serious consequences for your heirs, so remember to name the recipients of your assets.
Keep in mind that this is just a summary. There are many more provisions and exceptions in trust regulations. Your best bet is not to see a trust as a one-size-fits-all solution, but instead as a custom product for each family. Work with legal and financial professionals to establish the right kind of trust for your situation.