Revocable Living Trust
A revocable living trust can be a great estate planning vehicle that keeps your assets out of probate and minimizes settlement costs. However, there are (at least) seven big mistakes that I have seen when it comes to putting together a revocable living trust. While other attorneys may have different opinions on some of these items, I have found that avoiding these mistakes leads to your plans being administrated more effectively, less expensively, and with more peace of mind.
Co-Trustees: One of the worst mistakes is naming successor co-trustees to take over if you are incapacitated or pass on. For that matter, co-anything just leads to chaos. We have seen co-trustees argue, fight, and get nothing done, which is not what people intend. We had co-executors of a Pour-Over Will cause four months of delays just by taking weeks at a time for each filing just to get probate paperwork signed in front of a notary. Many people choose to have co-trustees in order to “spread the workaround,” but that rarely becomes the case because it is now becoming an extremely common practice for financial institutions to insist on all co-trustees signing paperwork, so now the paperwork is effectively doubled with two co-trustees.
Not Naming Enough Trustees: While it is our strongest recommendation to not name co-trustees, we also strongly recommend that our clients name multiple successive trustees so there are sufficient backups. Generally, we insist on our clients have a list of at least three successor trustees so that if anything happens to the first two, then there is a third “just in case” trustee lined up until they can revise their documents to add more. It also is fairly common to name a trust company after the list of three in case all of your named trustees are not able to serve or the trust continues for an extended period because there are younger beneficiaries. (Get your Free Trustee Cheat Sheet by clicking here.)
Restricting Your Trustee: Generally speaking, if you trust someone enough to name them as a successor trustee, you shouldn’t restrict their authority to use their best judgment in carrying out their duties. Trying to tie their hands by limiting their investment options, mandating specific beneficiary distributions, or denying trust funds being used for certain expenses just makes their jobs much more difficult. In many cases when we see these specific restrictions and mandates piled on, it’s not because they don’t want a trustee to have more discretion, it’s because they don’t want the trustees they have chosen to have that discretion. Usually, this is when parents are naming adult children as trustees out of a sense of obligation when they really would rather choose other relatives or friends.
Not Restricting Beneficiaries Enough: On the other hand, we often have seen people not restrict their beneficiaries enough, especially in terms of the age of inheritance. Eighteen is the age most states deem someone an adult. Twenty-one is when most states allow people to drink alcohol. And twenty-five is the minimum age most car companies will rent a car to someone on their own. But most of our clients believe all of those ages are far too young to receive a substantial inheritance. That is why we generally recommend an age of forty to mandate an inheritance be distributed. While that sounds pretty old, the way we structure a revocable living trust is by allowing the trustee to distribute inheritances in their sole discretion up until the age of forty, so if the trustee believes the beneficiary is capable of handling some or all of the inheritance earlier than forty, then they can distribute it. However, most of my clients agree that if you haven’t gotten your act together by the time you are forty, you probably aren’t going to, so restricting the inheritance longer probably isn’t going to do anything.
Not Building in Enough Beneficiary Contingencies: This is one of the uncomfortable parts of estate planning my clients dislike. While the fact that they are in my office planning their estate means they are addressing their own mortality, they may not be mentally prepared to discuss what happens if a child of theirs passes on before they do. Unfortunately, we have seen trusts that fail to go “a few layers deep” in naming contingent beneficiaries. It is very common to name beneficiaries as the children equally. But if a child passes on before getting their full inheritance, then what happens? The usual answer is that it goes to that child’s descendants equally. What if there are no descendants? Then it goes to the other children equally. But what if one of them has also passed on? Then that deceased child’s reallocation goes to their descendants. We try to at least go those three layers deep in planning contingent beneficiaries, if not more, before deciding on the trust estate usually going to the “next of kin,” charities, or a combination of both.
Not Funding the Trust: An extremely common mistake is not funding a revocable trust in the first place, or not being cognizant of the trust when changing investments or accounts later on. One of the main purposes of using a revocable living trust in an estate plan is to avoid the probate court process. However, because probate is based on the assets titled in the deceased person’s name after they have passed on, avoiding probate with a trust happens when the trust owns most accounts unless there is a solid reason not to. (Check out the free webinar on trust funding at http://www.trustfundingwebinar.com). If you think of your trust as the best suitcase in the world, it is meaningless if you don’t pack it.
Doing it Yourself: Estate planning is not a cheap process. On the other hand, it is a process that needs to be done correctly. Downloading forms or using online document preparation services can often lead to huge mistakes that aren’t caught until after someone has died, and now it is too late. In one case with our office, a couple had been with us for many years planning out how their disabled grandson was going to inherit everything in a protected way. Multiple trusts were created, and everything was lined up properly. At one point, they believed a small change was needed, but they didn’t want to pay a few hundred dollars to have the change done correctly. Instead, they ended up creating what was functionally a Last Will and Testament that ended up revoking all of their previous plans but did nothing but institute the small change to documents that they had just revoked. (Check out the YouTube video at https://youtu.be/qadZSEXOGjY.)
When it comes to estate planning using a revocable living trust, there is plenty of room to make mistakes. By avoiding these seven, you would hopefully be well on your way to crafting your own solid estate plan that avoids probate and other problems for your loved ones.