Don’t Make These Living Trust Mistakes When Planning Your Estate

It is a common misconception that only wealthy individuals with large estates can set up a trust to manage their assets after their death. The truth is, no matter how big or small your estate might be, you can use a revocable living trust to manage and distribute your assets efficiently after your death. A living trust is essentially a legal arrangement wherein you, the creator or “Grantor” of the trust, can place your assets and estate into the trust, appoint a Trustee or Trustees to look after and manage these assets upon your death, till the time they can be properly distributed to your chosen beneficiaries.

Doing so not only provides valuable support to your loved ones but also spares them from the heavy probate expenses later. Also, you, as the Grantor, can act as the trustee and control the trust till the time of your death or in case of any incapacitation.

While all this sounds simple, setting up a living trust has finer details that should be handled with care for the trust to be legally viable.

7 Common Mistakes to Avoid When Making a Living Trust

A living trust is a great way to handle and hand over your estate after your death. But even little errors in documentation or managing assets can lead to legal hassles, fights among your friends and family, and potential probate problems. Here’s what you need to avoid:

Ambiguity in Trust Document

The foundation of your trust is the Trust Document. Any mistake in drafting this crucial document, such as missing details, incorrect names, incorrect legal terms, or ambiguity in wording, can lead to severe consequences and conflicts – even invalidating the trust.

Consulting an experienced estate planning lawyer while drafting the trust document can help. The advisor, being well-versed in drafting such documents, can guide you on what to include and how to structure the trust document, making it transparent, comprehensive, and easy to understand. They can also point out any crucial things you might have missed while planning for your estate, ensuring no problems arise in the future for your beneficiaries.

Poorly Funded Trusts

For a living trust to be effective, it is necessary to first transfer the ownership of the Grantor’s assets in the name of the trust or create a provision that makes the assets “Payable on Death, i.e., a provision that allows the assets’ ownership to be transferred to the trust on the death of the Grantor. This procedure is known as “funding” the trust. Any assets that are not transferred to the trust and included in the Trust Document are considered outside of the trust and will have to go into probate, defeating the purpose of setting up a trust in the first place.

You can avoid this mistake by listing all the assets you would like to place in the trust. Then, gather necessary ownership and other documents (such as property papers or bank documents) for each of these assets and transfer the ownership to the trust. Update any other related documents accordingly. Only when your trust is properly “funded” can it function as you wish.

Failing to Put a Residual Clause

A common mistake when creating a living trust is failing to consider scenarios that may differ from the ideal. What if your beneficiary dies, or is the amount you set aside for debt and taxes high? In such a scenario, the remaining assets are disposed of in probate court, which can involve costly, lengthy court proceedings.

Adding a residual clause to the trust document can ensure that assets transferred to a deceased beneficiary are returned to the estate as part of the residuary. The clause can specify how assets in the residuary are to be treated, thereby saving the hassle of probate.

Choosing the Wrong Trustee or Not Having a Trustee Backup

After the Grantor, the most important person in a trust is the Trustee. All is fine while you are still the trustee yourself – but who will take on that duty thereafter? Hence, choosing a trustee whom you can implicitly trust, who has some knowledge of business and law, and who has the best interests of your loved ones at heart, is a must. If you choose a wrong or incompetent trustee, your beneficiaries will have to undergo a long legal procedure to find a new trustee before they can get access to their rightful inheritance.

In fact, having a backup trustee for a chosen trustee is also important, in case your chosen trustee dies or is incapacitated before the estate is distributed. Seeing how sensitive and important this role is, you can also rope in a professional trust company or accountant to help you out here. Not only are trust companies neutral in nature, but they are also well-versed in the requirements of a trust, making it easier for them to fulfill their trusteeship duties responsibly.

Failing to Review and Update the Trust Document and Assets

Drafting the Trust Document and funding the trust are steps in setting up a living trust. However, life can throw some unexpected surprises. Relationships with the chosen beneficiaries may change, as may your equation with the trustee, and the number and value of your assets. You might even want to add or remove certain beneficiaries from the trust as circumstances change over time (divorce, marriage, a new kid). If you do not review and revise the trust documents as per these changes in your personal, financial, and social situation, it could lead to unintended consequences such as uneven distribution of the estate among beneficiaries, wrongful inheritance to people you are no longer in touch with, or conflict among your loved ones over their inheritance.

To avoid all this, it is necessary to periodically review and update the terms of your trust document and assets. There are no restrictions on the number of times you can make changes to the trust document if they are made using the proper legal procedure. So, make sure you don’t simply draw up the trust document and put it away forever.

Not Discussing the Trust with Beneficiaries

Thinking and talking to your family about death and estate planning is never easy. However uncomfortable it may be, discussing your estate plans and the reasons behind them with your family is essential. Your family and other beneficiaries have a right to ask questions and clarify any doubts they might have regarding your decisions, as do the trustees you have chosen to manage the trust. By discussing your plans for the trust with them, you can prepare them well in advance for how to handle the estate when the time comes.

Missing Out on Key Documents Not Covered by the Trust

While the living trust and the trust document take care of your estate and its distribution and management, you need some key documents outside the trust to smoothly execute your plan.

• Power of attorney (POA): While the trust gets complete control of your assets and estate after your death, it does not have the legal authority to handle any other financial or legal matters on your behalf. For this, you have to draw up a Power of Attorney (POA) which entrusts a person of your choice to act and make decisions on your behalf in any financial or legal matters.
• Advance healthcare directive: This document gives a person of your choice the legal right to make your medical decisions in case you are incapacitated.
• Beneficiary designations: Assets such as retirement accounts and life insurance policies are not within the purview of your trust. For such assets, you will have to separately make provisions and regularly review and revise them to ensure your retirement savings and insurance money go to the intended beneficiary.

Without these documents, your family might have to take legal recourse to even handle necessities in your absence, even though you might have valid trust.

Contact DNTW Toronto LLP in North York to Help You With Your Estate Plan

A living trust can be a big support in helping your family cope financially with your incapacitation or death. Consulting an estate planning expert to set up a trust can save your family and loved ones from a lot of stress and anxiety in the future. At DNTW Toronto LLP, our accountants and estate consultants can provide services such as setting up a trust and managing its accounting and tax filing. To learn more about how DNTW Toronto LLP can provide you with the best estate planning expertise, reach out to us here.