Common Mistakes and How to Avoid Them
Creating a revocable living trust is a proactive and responsible step in estate planning. However, there are several common pitfalls that can undermine its effectiveness. Being aware of these mistakes can help you ensure your plan works exactly as you intended.
Mistake 1: Failure to Fund the Trust
We cannot emphasize this enough. The single most common and devastating mistake is creating a beautifully drafted trust and then failing to transfer assets into it. People pay an attorney to create the trust documents, sign them, and then forget to follow through with retitling their house, bank accounts, and other assets. An unfunded trust is completely useless for avoiding probate. The house will still be in your individual name at your death, forcing your family into the very probate court process you paid to avoid.
How to Avoid It: Work closely with your attorney to create a checklist of all assets to be transferred. Ensure the new deed for your home is properly signed, notarized, and recorded. For other assets like bank accounts or non-retirement investment accounts, contact the financial institutions to get the necessary paperwork to change the title or ownership to your trust.
Mistake 2: Choosing the Wrong Successor Trustee
Your successor trustee holds immense responsibility. They must be able to manage your affairs if you become incapacitated and then efficiently settle your estate after you die. People often choose a successor trustee based on emotion or tradition, like naming their oldest child, without considering if that person has the right skills or temperament for the job.
A good successor trustee should be responsible, organized, financially savvy, and, most importantly, completely trustworthy and impartial. Choosing someone who is not up to the task or who may have conflicts with other beneficiaries can lead to mismanagement, delays, and family discord.
How to Avoid It: Have a frank conversation about your expectations with the person you are considering. Do they have the time and ability to take on this role? Are they comfortable making tough financial decisions? Consider naming a co-trustee or a professional trustee (like a bank’s trust department) if your estate is complex or if you foresee potential for family conflict.
Mistake 3: The “Set It and Forget It” Mentality
A living trust is not a static document. Your life changes, and your estate plan should change with it. A trust drafted when your children were minors may no longer be appropriate when they are responsible adults. Major life events should always trigger a review of your trust.
How to Avoid It: Plan to review your trust document and asset funding every three to five years, or after any significant life event, such as a marriage, divorce, the birth of a grandchild, a major change in your financial situation, or the death of a beneficiary or named trustee. A quick consultation with your attorney can ensure your plan remains aligned with your current wishes.
Mistake 4: Misunderstanding What a Revocable Trust Can and Cannot Do
Many people have misconceptions about the powers of a revocable living trust. A common one is that it will protect their home and other assets from their own creditors or from being counted for Medicaid eligibility. This is not true. Because you retain full control over the assets in a revocable trust, they are still considered your assets. Creditors can still reach them, and they are generally countable for Medicaid purposes.
How to Avoid It: Understand that a revocable living trust is primarily a tool for probate avoidance and incapacity management. If your goals are asset protection or long-term care planning, you need to discuss more complex strategies, such as irrevocable trusts, with a qualified elder law or estate planning attorney. These are very different tools with significant trade-offs.
Mistake 5: Using a DIY or Online Trust Service
In an effort to save money, it can be tempting to use a low-cost online service or a fill-in-the-blank form to create a trust. This can be a very risky gamble. Estate planning law is highly specific to each state, and a generic document may not comply with your state’s laws or adequately address your unique family and financial situation. A small error in the document’s language or the way it is signed and witnessed could render the entire trust invalid.
How to Avoid It: The cost of hiring a qualified attorney to draft your trust is an investment in certainty and peace of mind. An experienced professional will not only provide a valid legal document but will also offer crucial counsel, helping you think through scenarios and choices you may not have considered. The cost of fixing a flawed DIY trust in probate court will almost certainly be far greater than the cost of doing it right the first time.
