A trust can be a powerful estate planning tool – protecting your assets from creditors, shielding your estate from loss, safeguarding benefits for the disabled, avoiding probate costs – we could go on.
And yet, many trusts fail to work the way they were intended to!
So what makes a trust fail? We’ll talk about some of the most common mistakes we see with trusts.
Failure to Fully Fund the Trust
This is a BIG mistake, and yet we see it frequently. A trust can only manage assets that are in the trust. If an asset is not titled in the name of the trust, then it is not protected by the trust. Therefore, all assets in the trust must state the trust as the owner. Simple enough concept, right? But you would be amazed how many people let assets slip their mind, and never re-title them.
The problem here is a lack of understanding. Just because you had an attorney generate your trust does not mean it’s fully funded. And if you used a more affordable online service to create your trust, there is likely an even higher chance that it’s not fully funded.
Fortunately, funding a trust is not as hard or confusing as it is time consuming. Once your trust is drawn up, you’ll need to:
- Sign a new deed placing your real estate properties in the name of your trust
- Change the ownership of your bank and brokerage accounts to your trust
- Change beneficiaries on your retirement accounts to your trust
- Change the beneficiaries on your life insurance policies to your trust
- Have any stock certificates reissued in the name of your trust
This list is by no means exhaustive, and it may be a good idea to employ the help of an estate planning attorney. Without being fully funded, a trust cannot fulfil its primary purpose – avoiding the probate process.
Your life is constantly changing, be it marriage, children, divorce, a new job – there are any number of changes a person can go through in their lifetime. As our lives change, it’s incredibly important that your trust and other estate documents reflect those changes. What if the guardian you chose for your child passes away? Or perhaps you no longer want assets to go to one of the beneficiaries.
Having a system in place to regularly review your estate documents is necessary to prevent your trust from failing.
Changing Tax Laws
Changing tax rules can affect the efficiency of your trust. Federal estate taxes, for example, have changed dramatically over the years. For 2017, the estate gift and generation-skipping tax exemption has risen to $5.49 million – but for many years, married couples created credit shelter trusts to benefit their beneficiaries back when the basic exclusion amount was substantially less than $5.49 million. Due to the significant tax change, these older trusts may now produce a different result than what was originally intended.
Unfortunately, we can’t predict when legal changes will happen in the future. So it’s important to make sure your trust is drawn up with great flexibility and with provisions to handle situations where there is or is not an estate tax.
Again, we think it’s incredibly important to have an attorney and financial advisor who will inform you of any legal changes that could endanger the intended outcome of your trust.
At Walsh & Associates, our Red Flag Audit® process includes a review of all your estate documents to check for accuracy and to make sure they are up to date. It is a service we include for all of our clients and has saved many from pitfalls we’ve found in their trusts. We highly recommend having an estate planning attorney and/or financial advisor that consistently reviews your documents.
Walsh & Associates and LPL Financial do not provide legal advice or services and this information is not intended to be a substitute for individualized legal advice.