Mistake #4: Not making full use of a living trust
Most people who have revocable living trusts don’t reap their advantages.
Often, the legal fees spent to create them were wasted, and the heirs don’t enjoy the benefits of the trusts.
In this fourth part of my series on big estate planning mistakes, I take a look at the mistakes people frequently make with living trusts.
Links to the first three parts of the series are at the end of this article.
In the typical living trust, you and your spouse transfer title to most of your assets to the trust and serve as co-trustees.
You have full control of the assets and deal with them just as before, except you act as a trustee instead of individual owner.
Living trusts have a lot of potential advantages.
The main one is the assets in the trust avoid probate.
After you pass away, a successor trustee takes over management of the assets and can begin distributing them to the heirs or taking other actions directed in the trust agreement.
The expense and delay of probate are avoided.
A living trust also provides privacy.
The terms of the trust and the assets owned by it aren’t recorded in the public record the way a will is.
A living trust also can be a big advantage should the original owner become disabled.
Again, a successor trustee can take over and begin managing the assets after being recognized by custodians of the assets.
The transfer might be smoother than when you rely on a power of attorney.
Unfortunately, the advantages of living trusts often are lost or diminished by mistakes and oversights.
Perhaps the most common mistake is to fail to transfer legal title of assets to the trust, known as funding the trust.
People often walk out of their estate planner’s office with the living trust agreement, and then they put it on a shelf.
The trust doesn’t own any assets, so none of the assets avoid probate or are subject to the terms of the trust.
For a living trust to work, you have to do the hard work of transferring legal title of assets to it.
That means changing the deeds to real estate and recording them as local law requires.
It also means re-registering the title to vehicles with the trust as the new owner.
Most financial accounts can be changed to the trust’s ownership simply by filing a form required by the financial services firm.
Many firms will want a copy of the certificate of trust or the full trust agreement.
At most banks and other financial institutions you don’t have to change the names preprinted on your checks.
They can have either the trust name or your individual name.
But the account statements and the financial institution records need to say the trust is the owner of the account.
When these steps aren’t taken, the result is an unfunded trust, of which there are many around the country.
Your assets won’t avoid probate, and a successor trustee won’t be able to manage the assets if you are unable to.
Instead, a power of attorney must be relied on to ensure your bills are paid and other actions are taken.
And all your assets will go through probate and be governed by your will.
Another mistake is not to bring the successor trustees into the picture early enough.
The successor trustees take over management of the trust after you pass away or are unable to manage the trust.
For this transition to be smooth, the successor trustees must know you selected them.
They also should have copies of the trust agreement and know where the original is located.
You also should make them familiar with the assets they will be managing.
A good move is to be sure the custodians of your financial accounts are familiar with the successor trustees.
As with the power of attorney, it is best to get to know one or more individuals at your financial institutions and introduce them to the successor trustees.
Otherwise, when it is time for the successor trustees to act, they might have to go through a long process or proving who they are and that they are entitled to manage your assets.
That would substantially reduce an advantage of having a revocable living trust.
The first three parts of this series are here, here and here.
