A living trust is an important estate planning tool for many people. But only if the trust is set up accurately.
Here are some of the most common mistakes and how to avoid them.
Not Having a Properly Drafted Living Trust Document
Whether you decide to do it yourself (DIY) or use the services of an estate planning attorney, it is important to have a well-drafted living trust document. This should include:
- Valid trusted language. This consideration is especially important if you choose the DIY method. DIY templates often require customization to meet specific needs, so you need to ensure that any changes to the document don’t remove the legal language that is essential for setting up the trust.
- Your specific goals. It is a mistake to think that a basic trust document will accomplish all of your goals. There is no one-size-fits-all when it comes to trusts, and living trusts are no exception. If you have a specific estate planning goal — such as minimizing estate taxes or providing for a beneficiary who is a minor — you need to make sure your trust uses legal language to accomplish that.
Failing to Properly Transfer Assets to the Living Trust
The main purpose of your living trust is to distribute assets to your beneficiaries according to your wishes after your death. 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 the title to the asset to your trust by filling out and filing all the required paperwork.
- In the case of assets with beneficiary designations, like life insurance, you must properly designate your trust as the beneficiary of those assets.
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 manage the trust for you. Your choice of successor trustee can make a big difference if you’re no longer around to administer the trust yourself.
Thinking That a Living Trust Is All You Need
Trust plays an important role in estate planning, but you should use other equally valuable estate planning documents to complement your plan. For example, suppose you followed the instructions for choosing and designating the appropriate 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.
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, and you’ll ensure your trust continues to function optimally by meeting all your changing estate-planning needs.