We haven’t discussed mistakes and misconceptions that many people have regarding trusts in a while. You may have a revocable living trust in your estate plan. Living trusts are very powerful planning tools that you can use for all kinds of purposes. Trusts can avoid probate, or provide for your family cottage, your favorite charities, your pets, or education for your loved ones. Your trust can also provide protections for beneficiaries in the event of divorces, creditors, re-marriage, governmental benefits, addictions, disabilities, or lack of motivation.
Your trust may have been signed and then put away in a drawer or safety deposit box not to be looked at again for years. This can result in an estate plan that does not work as intended. But trusts, like any other tools in your shed, must be kept sharp. When a trust is part of your overall comprehensive estate plan, you should try to avoid the seven most common trust mistakes that I see.
Mistake #7: Forgetting your favorite charities.
About 89% of Americans donate to charities during their lifetimes. However, only about 3% of Americans provide for charities after they are gone. If you give regularly to a church or other favorite charity during your lifetime, your donations expire with you. These organizations that have depended upon your donations during your lifetime will no longer have those donations after you are gone unless you provide for them. You may want to consider a bequest to your favorite charities after you are gone.
Mistake #6: Thinking that assets in a revocable living trust escape estate taxes.
You may think that if you put your assets in a revocable living trust, those assets will escape estate taxes. Upon your death, any assets in a revocable living trust are considered your assets in your gross estate for estate tax purposes. In 2014, you can leave up to $5.34 million estate tax free to your beneficiaries. However, you and your spouse can double the amount of those assets to $10.68 million by using properly drafted and funded separate revocable living trusts.
Mistake #5: Thinking your trust protects you from your creditors.
Most revocable living trusts are not creditor protection devices for the trustmaker. Most living trusts are drafted so that you have full authority to change, amend, alter or revoke the trust and you have full access to the assets in the trust. If you have full access to your trust assets, so do your creditors. Similarly, assets included in your revocable living trust are available or countable resources for Medicaid purposes.
Although revocable living trusts are not creditor protection devices for the trustmaker, they can be very effective creditor protection devices for your beneficiaries. Properly drafted and funded trusts for both you and your spouse can protect your trust assets from your spouse’s creditors and vice versa. A trust can also protect the assets you leave to your beneficiaries from their creditors.
Mistake #4: Choosing the wrong trustee.
You may have named your children in birth order as your successor trustees. This may not always be the wisest choice. Money management skills may not be one of the gifts that God has given your chosen successor. When choosing a trustee, make sure that the person that you are choosing has the ability to manage your assets. If a child has a substance abuse problem, has poor money management skills or is married to a predator, it may not be prudent to name him or her as your trustee. You may want to name multiple co-trustees to manage your assets during your disability or after your death.
You could also name a professional trustee such as a bank or trust company to be a trustee or co-trustee during your lifetime or upon your disability or death. These professional trustees are in the business of managing assets for a fee. If you are not leaving the assets directly to a child as a result of substance abuse problems, poor money management skills, creditor issues or otherwise, an independent professional trustee making distribution decisions is often times better for family harmony.
Mistake #3: Using form documents.
Many people attempt to draft their own trusts by using forms found on the internet or in legal software packages. Many attorneys will also use forms-based documents. When preparing a trust, the old adage “You get what you pay for” is very often true. The forms-based trusts usually treat everyone the same. For example, many form trusts have the provision that your successor trustees take over if you become disabled in the opinion of two physicians. Most of my clients would rather have their family making this decision instead of non-family members.
Most forms-based trusts are also only will substitutes which provide upon your death that your property is distributed outright to your beneficiaries. For many, outright distributions are not the best protection for your beneficiaries. Many trustmakers want to provide for their beneficiaries with lifetime trusts, which offer protections from creditors and divorcing spouses and the ability to continue these protections for the beneficiaries’ descendants.
Mistake #2: Failing to update your trust.
Your trust should be reviewed at least once a year to make sure that it still meets your needs. There are many changes that can trigger an update to your trust. There may be changes in your personal life such as births, deaths, marriages or divorces. There may be financial changes in your life such as job changes, retirement, the stock market goes up or the stock market goes down. There are tax and non-tax changes in the laws. Congress never fails to pass some sort of a tax act every year. There are also changes in your attorney’s experience. As I learn and experience new things, I incorporate what I learn into the plans that I draft.
Mistake #1: Failing to properly fund your trust.
If you have not put your assets into your trust, also called “funding” your trust, or did not fund them properly, you have lost some of the benefits of your trust. Funding is the proper titling of assets in the name of your trust or individual names and/or proper naming of your trust and/or individuals as asset beneficiaries and as additional insureds on casualty and liability insurance policies. If you have a trust, it should be fully funded.
Any assets that are in your own name at the time of your death will need to be probated. However, any assets that are properly funded in your trust at the time of your death will avoid probate and usually result in lower after death administration costs.
Properly funding all of your assets in your trust means that all assets will be distributed according to the detailed instructions that you leave in your trust. Having a trust without funding it is like buying a brand new car, but not filling it with gas; it looks great, but it does not go anywhere.
By avoiding these mistakes, you can stay in control while you are alive and well, provide for you and your loved ones in the event of your mental disability, and after you are gone, give what you have to whom you want, when you want, the way you want.
By: Matthew Wallace, CPA, JD
Published edited February 9, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Avoid the seven most common trust mistakes