Creating a revocable living trust is a smart move for effective estate planning. It provides a level of control and privacy that other methods, like wills, often cannot. However, many individuals and even professionals make serious mistakes when setting up their trust. Recognizing and steering clear of these errors can drastically improve how effectively your trust operates for you and your beneficiaries. Here are the three major pitfalls to avoid.
Failing to Fund the Trust
One of the most common and expensive mistakes is failing to fund the trust after its creation. A trust is only effective if it actually holds assets. This means you must transfer the ownership of your properties, financial accounts, and other valuables into the trust. If you overlook this crucial step, your assets may still face the probate process when you pass away.
Funding your trust requires updating the titles of your assets. For example, if you own a home valued at $300,000, transferring the title from your name to the trust can save your heirs a lengthy probate process, which might take over six months and cost thousands of dollars in legal fees.
Remember that not every asset can or should simply go into a trust. Certain accounts, like retirement plans and life insurance policies, may provide for specific beneficiary designations. This oversight regarding insurance can drastically complicate matters for your beneficiaries.
Conduct a detailed inventory of your assets and consult an estate planning attorney to guarantee that everything is accounted for and incorporated into your trust after it is created.
Naming Your Trust as Insured
You've spent all the time and moved your house and other assets into the trust, so don't forget to add the trust to your insurance policies as well. If you've never had to go through the process before, you'll quickly find out that if something happens, the insurance company will only pay out to those who are specifically named on the policy. If you have transferred your home to the trust, your trust is now the owner of the home and needs to be added to your insurance policy as an insured. If you don't add the trust, then you may be paying for insurance coverage that won't properly protect you in case of a tragic event.
Any asset that is transferred to the trust that has insurance coverage needs to have its insurance policies reviewed. This is why, rather than have to go one by one, it's important to have an insurance professional who will know which assets need to have their insurance policies changed. Generally the following policies should be reviewed:
Home Insurance - Although you continue to live in the home and everything seems to be the same, your trustee now owns the home and not you, and from an insurance standpoint, there can be big changes. If there's a fire that destroys your home and your insurance does not name the trust, you may not be able to collect your insurance proceeds (for example, this is a truly heartbreaking situation occurring right now with the California wildfires).
Umbrella Policies - Failing to update these policies could subject the trust assets to to claims, judgments and legal expenses, which defeat some of the trust's purpose.
Personal Property Insurance: Because a trust-based estate plan generally will include an assignment of personal property transferring ownership of personal property to the trust, policies covering these assets and especially valuables like fine jewelry should also be updated.
Make it a habit to regularly review your policies. When significant life changes occur—such as marriage, divorce, or a new child—reassess your coverage amounts and ensure the trust remains the named beneficiary or additional insured. Ignoring this can lead to insufficient financial support for those you leave behind.
Not Updating the Trust
Once you have established your revocable living trust, you have not crossed "estate plan" off your to-do list. Instead, you have just embarked on your journey to leaving a legacy. That's a lifelong mission. Regularly reviewing and updating the trust is crucial to accommodate any changes in your life circumstances or desires. Many people mistakenly forget to do this, which can create complications later on (which is why we offer free lifetime amendments annually to our clients).
Major life events, like marriage, divorce, the birth of children, or the loss of loved ones, may require changes to your trust provisions. For instance, if you welcome a new child into the family, it's wise to include them in your trust provisions to provide for their guardianship and ensure their rightful inheritance.
Another example may be as simple as John and Jill are husband and wife. John's trust names "Jill" as a beneficiary by name. Unfortunately, the two divorce and a year later John marries Sally. John never updates his documents and several years later, passes away. Because Jill was named specifically and John did not make any changes, she as his ex-wife is entitled to everything provided for her in the trust, even though John remarried to Sally after he and Jill divorced several years ago.
Neglecting to update your trust can lead to unintended mistakes, like leaving out a new heir or failing to clarify how to divide specific assets. In our experience, about half of individuals do not update their estate plans after significant life changes without reminders, often resulting in conflicts among beneficiaries due to unclear or outdated language.
To keep your revocable living trust, or any estate planning document, in line with your current intentions, set up regular reviews with your estate planning attorney. These appointments can also serve as a chance to evaluate your funding and beneficiary designations.
Consult Experienced Professionals for your Revocable Living Trust
Creating a revocable living trust is an excellent step to secure your estate and care for your loved ones. By avoiding the three main errors—failing to fund the trust, neglecting to update insurance policies, and overlooking updates to the trust instrument itself—you can ensure that your estate plan performs as intended.
Addressing these issues promotes peace of mind, knowing your assets are protected and your wishes will be honored. A well-crafted revocable living trust not only simplifies the estate planning process; it also builds a legacy of your wise planning for future generations.
For the best results, engage professionals in estate planning. Their expertise can guide you through the complexities of the process and help you navigate potential pitfalls, ensuring your legacy is safeguarded for years to come.
If you're ready to take control of your estate plan and avoid costly mistakes, now is the time to act. Contact us today through our contact form to schedule your personalized consultation and ensure your estate plan reflects your intentions, no matter what life throws your way.
Comments