Biggest Trust Mistakes—6/18/08

Trusts have earned high marks for being valuable planning tools.  Lots of folks earn an A+ for their efforts to make a trust.  But lots of people are getting F's for making costly trust mistakes.  We've created and reviewed hundreds of Trusts, and we've made a list of the four most common things folks fail to do.

1. FIRST: FAILURE TO FUND.

Most people who make revocable living trusts to so to avoid probate at death.  And that makes sense: probate can be costly and time consuming.  But unfortunately, I've seen many people make a trust, then still go through probate at death.  What did they do wrong?  They failed to fund the trust .  A trust is like a basket, and assets in the basket don't go through probate at death.  But you have to move your assets into the basket while you're alive.  It's not that hard to do; just change the names on your bank accounts, mutual funds, house, and other things from your name, John Smith, to the John Smith Trust.  Banks and brokers have easy forms to use.

2. SECOND: FAILURE TO UPDATE.

Any legal document you make, a trust, a will, a power of attorney, should be reviewed and periodically updated.  Things change, people change, the laws change.  For example, if you named your mom as a beneficiary, or as an alternate trustee, and she's now very ill, you may want to name someone else.

3. THIRD:  FAILURE TO NAME THE RIGHT TRUSTEE.

Most people who create trusts serve as their own trustees.  That's usually fine.  But you'll need an alternate, or two or three, in case you can't serve in the future.  Don't just pick your oldest child because he's oldest; don't just pick someone because they living nearby; pick the person you trust the most.  Even if the person is a grandchild, even if the person lives in California, pick the person you trust.  I've seen too many cases in which the wrong person is picked as trustee, and all kinds of bad things then happen.

4. FINALLY: FAILURE TO CREATE BLOODLINE OR SAFE TRUST PROTECTIONS.

In most situations, people leave inheritances directly to children when both parents are gone.  But if you do that, the inheritance may end up with your child's spouse or creditors, and that's not what most people want.  If your child gets a divorce after receiving your inheritance, the in-law may go after 2.  When your child dies after getting your inheritance, your child probably leaves everything to his or her spouse.  And the spouse may in turn leave the assets, including your assets, to a new boyfriend or girlfriend, husband or wife, and not to your child's children.  If you leave assets to your kids and they later run into financial problems, or get sued, your money may go to their creditors.  There is one and only one way to protect against these problems: create SAFE Trusts for the kids as part or your regular revocable living trust.

Trusts can be valuable tools to avoid probate and save money, if they are done right.  Does your Trust make the grade?