Not long ago I highlighted 5 Revocable Trust Mistakes you should avoid when you implement an estate plan. I’ve seen and reviewed hundreds of trusts and here are 5 More Revocable Trust Mistakes you should avoid.
1. Making Outright Distributions
Outright distributions means that upon your death, your trustee gathers up all the assets, divides them up (how you designated), and hands the assets over directly to the beneficiaries. But what if the beneficiary is young, irresponsible, disabled, or in the middle of a lawsuit, bankruptcy or divorce? Making outright distributions may be simple, but it’s not ideal. The assets could now be squandered or lost. Even worse, the assets could be used to fuel self destructive actions by an irresponsible child. There are far better ways to divide the assets upon your death which are more protective, such as holding the assets in trust for the beneficiaries. One of the best things a revocable trust provides is the ability to pass assets along to your beneficiaries and preserve your desires. You can control from the grave how the assets are to be used to preserve your intent.
2. Not Updating Your Trust After Divorce
After divorce it is crucial that you update your estate planning. Spouses often have joint trusts outlining division of assets etc. Divorce decrees and settlement agreements outline division of assets, child custody, and spousal support etc. But what if you never change your trust, and for that matter, the named beneficiaries on life insurance policies and retirement accounts. Some states have laws that help with this, but nothing will help more than updating your own estate planning. You most likely don’t want to name your ex-spouse as your trustee or beneficiary of your trust. After divorce, your assets have changed and you should update your planning to conform to your new assets and your new desired inheritance plan, which most likely will not include your ex-spouse.
3. Giving the Wrong Assets to Charity
I am always encouraged when people designate a portion of their estate to go to charity. However it’s important to use the best assets for charitable bequests. You don’t want to miss out on the most tax advantageous way to make these gifts. If you have funds in a tax deferred retirement account upon your death (IRA or 401k etc.), the beneficiary of that account must pay income tax when they withdraw the funds over time. A charity, however, is tax exempt, so the charity pays no income tax when they take it out. And you paid no income tax on the money that went into the retirement account.
To contrast, if you gave other assets from your trust to charity and named children as beneficiaries of your retirement account, your children would pay income tax on withdrawals from the retirement account. It is far better to name a charity as beneficiary of some or all of your retirement account. Your children won’t pay tax on the assets they inherit from your trust because there is no income tax on the receipt of a gift or inheritance. On top of that, the income tax basis in the assets step up to fair market value on your death which saves tax when your children inherit assets rather than retirement accounts.
4. Not Providing a Process for Division of Tangible Personal Property
Whether you have a modest estate or tens of millions of dollars there is always the issue of how to divide tangible personal property. Too many times I’ve seen families get into fights and resent each other for years because of disagreements or misunderstandings about who got grandma’s wedding ring, or dad’s guitar. It’s far better to make this clear to avoid conflict. We can do this two ways.
- Tangible Property List: Include a provision for leaving a list to designate specific items to specific people. If you leave a list, those things will go to those people. This helps a lot, especially if you only have one piano and 5 children. You can designate which one gets it.
- Process for Division of Property: It is incredibly helpful to include a process for dividing up tangible property which is not specifically designated on a list. In my opinion, having a process is more important than what the process is. Options could be as simple as the children getting together and drawing numbers out of a hat and then taking turns selecting tangible property. One of my favorites is to have a family auction. Each child is given an equal amount of fake money which puts them all on the same playing field economically. Then they put an item up for bid. If the child wants it bad enough, they’ll bid for it. If not, they wait for the next item. These or any number of variations are helpful to ensure that there is a process to divide up property rather than children raiding the house and taking what they want.
5. Forgetting That The Trust is For You First
In the estate planning discussion we talk so much about the inheritance plan, which is very important. But one of the main purposes of a revocable trust is incapacity planning for yourself, not just a plan for who gets your stuff when you die. There’s more to it than probate avoidance. You set up the trust while you’re still alive, hence the name “living trust.” You are the trustee while your alive and have mental capacity. The priority of the trustee is to make sure that you are taken care of during your lifetime. If you are incapacitated and cannot care for yourself, your chosen successor trustee uses your resources to continue taking care of your needs during your lifetime. If you regain capacity you may become trustee again. Remember that the first priority of the trust is to care for you, even through incapacity. Only after you pass away does the inheritance plan kick in.
I hope this list of 5 More Revocable Trust Mistakes helps you make better planning decisions. A qualified attorney can help guide you through the process. Your peace of mind is paramount.