A living trust is an invaluable estate planning tool for many people. But only if the trust is set up properly.
Here are some of the most common mistakes and how to avoid them.
1. Not Having a Properly Drafted Trust Document
Whether you've decided to do it yourself (DIY), or are enlisting the services of an estate-planning attorney, it's vital that you have a properly drafted living trust document. It should include:
- Valid trust language. This consideration is particularly important if you've opted for the DIY approach. DIY templates often require customization in order to meet specific needs, so you should ensure that any revisions to the document have not eliminated any legal language that's essential for setting up the trust.
- Your specific objectives. It's a mistake to assume that a basic trust document will meet all of your objectives. There's no one size fits all when it comes to trusts, and living trusts are no exception. If you have a particular estate-planning objective—for example, minimizing estate taxes, or providing for a beneficiary who's a minor—you need to ensure that your trust uses the right language to meet that objective.
2. Failing to Properly Transfer Assets to the Trust
The main purpose behind your living trust is to distribute assets to your beneficiaries according to your wishes after your death. In order to do this, your trust needs to be properly funded. Your intention to transfer your assets to your trust has no legal effect if you don't carry through on that intention.
- For most assets, you will need to properly transfer title to the asset to your trust by filling out and filing all the required paperwork.
- In the case of assets like retirement accounts, you must properly designate your trust as the beneficiary of those assets.
3. Not Designating a Successor Trustee
You've most likely appointed yourself as the trustee of your living trust, but it's just as important that you designate a successor trustee. The role of a successor trustee is to step in to manage the trust if you become incapacitated and, while you likely aren't expecting anything to happen to you in the near future, choosing a successor trustee isn't a decision you want to leave for later.
Additionally, remember that a successor trustee needs to be someone you trust to manage your assets according to your wishes when you're no longer able to, whether because of illness or death.
While it might be tempting to go with your oldest child or best friend, you need to carefully consider the person's temperament and ability to administer the trust for you. Your choice for successor trustee can make a big difference if you're no longer around to administer the trust yourself.
4. Thinking That a Living Trust Is All You Need
While a living trust will play an important role in your estate plan, you will likely need to implement other, equally valuable estate planning documents to round out your plan. For example, let's say you've heeded the advice to choose and designate a suitable successor trustee for your living trust. You're confident that you have the right person to step in if anything happens to you.
However, your successor trustee only has the capacity to handle the financial decisions related to your trust. If you have any concerns about medical decisions that need to be made if you're incapacitated, you'll need to address these concerns through a document such as a durable power of attorney for healthcare.
A durable power of attorney is only one of the tools that can complement your living trust. If you're uncertain about what other estate-planning documents you may need, it can be helpful to consult with an estate-planning attorney.
5. Failing to Review Your Trust Regularly
You've made certain that you haven't made any of the mistakes outlined above, and you know you have a valid trust that meets all of your current estate-planning objectives. Unfortunately, your job isn't done.
Life changes all the time, and your trust needs to change with it. And it's not just major life events, like the birth of a child or a new relationship, that can have an impact on your trust. Even something as minor as the acquisition of a new asset might make a change to the terms of your trust a necessity.
Make it a habit to review your trust on a regular basis, whether it's every six months or once a year, and you'll ensure your trust continues to function optimally by meeting all your changing estate-planning needs.
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