Trusts are an incredibly valuable estate planning tool, but you shouldn’t overlook the potential disadvantages alongside the many benefits. It’s important to think about the downsides of trusts before deciding whether a trust is the right vehicle for you. Then, if you create a trust as part of your estate plan, you’ll know how to avoid common mistakes.
Mistakes you should avoid when establishing a trust account
When contemplating the idea of including a trust as part of your estate, avoid these mistakes:
- Opening the wrong type of trust
- Neglecting to discuss matters with your spouse first
- Forgetting to safeguard your beneficiaries from potential lawsuits
- Opening a trust without adding assets to the account (aka Funding the trust)
- Electing someone who doesn’t have your best interests in mind as the trustee
In-depth explanations about trust-related problems and how to avoid them
Now, let’s analyze the five mistakes listed above and explore why they can be life-altering decisions.
Opening the wrong type of trust
Since trusts are personalized to you and your financial situation, they aren’t one-size-fits-all documents. This means trust documents vary depending on your objectives and how you intend to manage your assets.
If you anticipate needing Medicaid benefits, for instance, you require a trust structure that shields your assets from being counted as income for Medicaid eligibility. So, utilizing a living trust for this purpose would be inappropriate.
Neglecting to discuss matters with your spouse first
Since your spouse will likely inherit your assets, you must decide whether to let them change how those assets are distributed. Flexibility can help with future family changes, but in second marriages, it may risk your children from a prior marriage losing their inheritance.
Forgetting to safeguard your beneficiaries from potential lawsuits
You might not be aware of your ability to design the trust to safeguard assets from creditors or divorce proceedings, a measure of protection beneficial for your descendants. Through proper drafting and funding, beneficiaries can manage and enjoy the inheritance with reduced risks compared to outright ownership. For instance, a beneficiary-controlled trust offers protection against life’s adversities that may arise undeservedly.
Opening a trust without adding assets to the account
Having trust documents is only the beginning. Your assets must be formally assigned within the trust in order to officially be part of it. Otherwise, assets that remain in your name will be subject to probate proceedings. This is called “Funding” and is an extremely important step in setting up your estate plan.
Electing someone who doesn’t have your best interests in mind as the trustee
Selecting a trustee, along with a backup trustee for a living trust, is essential. These individuals must be trustworthy and capable of fulfilling their fiduciary obligations to manage your assets and the trust in accordance with your wishes.
Ready to set up your trust properly?
If paperwork is a mind-numbing experience for you, you should either mentally prepare yourself in advance or hire someone who is professionally skilled at assisting people like you with the setup process. For your trust to be properly established, you will need to fill out all the applicable paperwork denoting the assets within the trust and stating that the assets are now owned by the trust.
By doing so, you can take active measures to evade probate while simultaneously ensuring that your trust is both operated and carried out according to your intentions. Unfortunately, if you fail to adequately set up your trust, the responsibility will fall on the shoulders of your beneficiaries when you pass away, resulting in probate hearings that can take a long time to finalize.
As you can see, there are a number of mistakes that can be made when drafting trust accounts. But don’t worry! When you know what to avoid, you increase your chances of evading errors like those we mentioned above.
Consider reviewing your trust accounts periodically to ensure that they are always up to date with current laws and regulations. Checking on the status of your trusts means you can catch any discrepancies when it comes to your current preferences, as your intentions may change over time.
A trust is not something you want to DIY on your own. Consult an experienced estate planning attorney to review your trust or help with the creation of one.
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