Setting up a trust can be a great way to protect your assets and ensure your loved ones are taken care of. However, mistakes can be made during the process, which can result in unnecessary headaches and complications. To help you avoid these pitfalls, we’ve compiled a list of the top 10 most common mistakes people make when setting up trusts.
- Not Funding the Trust: A trust is only as useful as the assets it holds. Make sure to transfer your assets into the trust and manage them with the trustee, otherwise your trust is just an empty document.
- Putting Your Homestead in the Trust: Transferring your homestead into a trust may lead to losing valuable benefits like creditor protection, tax exemptions, and bankruptcy protection. Additionally, mortgage companies may refuse to refinance or extend new financing for a home in a trust. Consult a professional to determine if a “qualifying trust” is right for you.
- Funding the Trust with a Vacation Home: Be cautious about placing a vacation home in a trust, as it can become a burden for beneficiaries. Instead, consider discussing other options, like a family limited partnership or an LLC, with an estate planning attorney.
- Not Understanding the Trust Document: Trust documents can be complex, but it’s crucial to understand the terms and provisions outlined within. Familiarize yourself with your trust to ensure your financial future and legacy are secure.
- Failing to Review the Trust Annually: Life changes, and so should your trust. Regularly review and update your trust to account for new assets, financial conditions, or changes in family dynamics.
- Overlooking Successor Trustee Selection: Choose your successor trustee wisely, as they will be responsible for managing the trust if you become unable or unwilling to do so. Consider their reliability, trustworthiness, and financial acumen.
- Not Updating Beneficiary Designations: Ensure that your trust and other estate planning documents are consistent in terms of beneficiaries. Update beneficiary designations as needed to prevent confusion or conflict.
- Ignoring Potential Tax Implications: Trusts can have various tax implications. Consult with a tax professional to ensure that your trust is structured in the most tax-efficient way possible.
- Neglecting to Communicate with Beneficiaries: Keep your beneficiaries informed about the trust and its provisions. Open communication can prevent misunderstandings and reduce the likelihood of disputes.
- DIY Trust Creation: While it may be tempting to create a trust on your own, it’s best to consult with an experienced estate planning attorney. They can help ensure that your trust is properly drafted, funded, and maintained, ultimately protecting your assets and your loved ones.
By avoiding these common mistakes, you can set up a trust that meets your needs and ensures your assets are managed effectively for the benefit of your loved ones.