Mistakes to Avoid When Setting Up a Trust
Trusts can keep your estate out of probate and potentially reduce taxes. You should understand how to correctly set up a trust to avoid problems and ensure your intentions are honored after your death or incapacity.
Having the Wrong Goals
Before setting up a trust, you should write down what your intentions are. Do you want to leave real estate to your child? Would you like for them to receive an annual cash distribution after your death? It’s important to thoroughly outline the purpose of your trust.
Look at your initial plan with a critical eye. Ask yourself if this plan is what’s best for the beneficiary. If you don’t think your child is financially responsible, this will affect what type of plan is best. You would want more restrictions on their access to the assets to ensure they can stay financially sound for the long haul after your death.
Failing to Include Asset Protection Provisions
Some people expect the trust to automatically protect their assets. Not having any restrictions in place puts the assets at greater risk. The trustee could mismanage them, or the beneficiary could make mistakes. If the purpose of your trust is to fund your beneficiary’s college education, then clarify in the legal documents that the money is only allowed to be used for college. An estate planning lawyer plays an important role in choosing the right phrasing to ensure your asset protection provisions are valid.
Choosing the Wrong Trustee
Even in higher-end estate planning, choosing the wrong trustee is a common mistake. Many people rush into it and make the decision based solely on feelings. However, it’s important to ask yourself a series of questions to choose the right trustee.
Two factors that many people fail to consider are the trustee’s age and health. How likely is it that they will still be around after you die? How old will they be once your beneficiary receives the trust? Also, consider what their basic judgment skills have been in the past. Do they typically make the right decision? Are they financially responsible? Do they know how to say no? Your trustee doesn’t have to be a relative. They could be a professional.
Never Reviewing the Trust
Reviewing the trust on an annual basis is important both for lower-end and higher-end estate planning. Unexpected things happen in life, and things also change. Thus, you should schedule time on an annual basis to review your trust and other estate plan documents. The person you chose as the trustee may no longer be suitable. They may have fallen seriously ill, or you may have lost trust in them. You may decide that you no longer want someone to be your beneficiary, or you might want to revise the rules surrounding their gifts and inheritance. If a beneficiary dies, then you’ll need to remove them from the trust. You may also want to add a beneficiary.
It’s important to sit down in a quiet place to review your trust. Life gets hectic, so it’s easy to forget and continuously put off updating it when life circumstances change. Remember to also change the beneficiary on your asset documents when you make this type of change in your estate plan.
Setting Up the Wrong Type of Trust
Learn about the differences between the different types of trusts in order to choose the right one for your intentions. Your options include revocable, irrevocable, special needs, charitable, and marital. There are generally only a few situations in which you could modify or revoke an irrevocable trust. Revocable trusts give you the freedom to change or dissolve them on your terms.
If your beneficiary has special needs, then you could set up a special needs trust for them. With this type of trust, they could continue receiving government benefits in addition to whatever financial assistance you provide them through your trust.
If you want to leave money behind for a charity, you can avoid taxes by setting up a charitable trust. You could reduce federal when you leave behind assets for your spouse through a marital trust compared to using a will to transfer them.
Put careful consideration into setting up a trust. You don’t want to make any of the above mistakes that could result in your intentions not being honored after your death. Call us today at 201-996-1200 to set up an appointment to discuss your goals with an estate planning lawyer.