What are common mistakes to avoid when setting up a trust?

There are a lot of mistakes a person can make when creating a trust, but here are just three common examples to keep in mind when setting up your own trust.

1. Forgetting to fund your trust

When you create your trust, it is like an open bucket that needs to be filled with things. If you don’t place an asset in the bucket, then your trust generally won’t operate properly.

So, when you sign your trust, you should generally also be placing your home and other real estate inside the trust as soon as possible (we generally have our clients sign a deed transferring their property to the trust immediately after they sign the trust document at their estate planning signing).

If you own a business, then you’ll also want to make sure the ownership in that business is held in trust - for example, if you are a member in an LLC then you’ll want to make sure those ownership units or shares are retitled to show the trust as new owner of those shares (subject to requirement set forth in your company’s operating agreement). A similar process can be done if own shares in a privately held corporation.

Whether or not you should immediately retitle financial accounts in the name of the trust depends on your specific situation. For example, many of my older clients will go to their bank where they have a checking or saving account and ask that the account be re-titled into the name of the trust. Wealthier clients will also generally want to retitle their financial accounts (or at the very least their taxable brokerage accounts) into the name of their respective trusts for tax planning purposes.

Other clients, typically my younger clients, will opt to simply update their pay on death (POD) or transfer on death (TOD) designations on their financial accounts to be the trust since it may require less paperwork/hassle to make that change. The same goes for life insurance policies - you will just want to make sure that the trust is named as the death beneficiary.

Retirement accounts can’t be placed in the trust during your lifetime because of the tax rules associated with them, so you’ll generally keep your spouse as the primary beneficiary and most clients (especially those with younger children) will name the trust as the contingent beneficiary.

By making sure your trust is properly funded, you can ensure no assets pass through probate court, and that the trustee has authority to manage those assets as instructed in your trust documents based on your intentions.

2. Not having sufficient contingency planning in place.

Estate plans are designed to provide peace of mind and to make sure all possible scenarios (within reason) are accounted for.

The less ambiguity, the better, even if it may seem like overkill in certain scenarios.

So, when you’re drafting your trust, you’ll want to make sure you are considering what would happen to your assets if your intended beneficiary predeceases you. If it’s your child, would his or her share go to your daughter-in-law or son-in-law or would it go to your children’s children (I.e., your grandchildren)? If it goes to your grandchildren, would it go to them outright or should it be held in trust until they are older? And if it’s held in a sub-trust, what should the terms of that sub-trust be?

Sometimes clients will ask me why trusts (or really any estate planning document) is so long or wordy, and the reason is that we need to make sure all these scenarios are accounted for. The good news is that the attorney will be able to do a lot of this thinking for you based on best practices (what most clients prefer) so you can let them do the heavy lifting and then modify whatever provisions are most pertinent to your individual preferences.

3. Not providing clear instruction on what happens to your real estate after you’re gone.

In a similar vein to # 2, you shouldn’t leave anything to chance and that’s especially true when it comes to real estate. If I had to guess the most common cause of family conflict in an estate plan, it’s because the parents didn’t provide adequate instruction on what happens to their real estate after they are gone.

Whether it’s the home all the kids grew up in, the family cottage on the lake, or the investment property in the city - you need to instruct the trustee as to what your intentions are with each type of property.

Once again, most attorney will have best practices in place for how to deal with real estate after you’re gone. The standard language usually states who has the first option to purchase, how the purchase price is determined, and when that option must be exercised by before the option lapses.

By being clear on your intentions, you’ll save your family from a lot of hassle (and legal fees) and be much more likely to keep the family harmony intact.

If you’d like to learn more about estate planning, or would like me to review or create a trust for you, then click the link above to schedule a call with me today. I’m always happy to help!