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Mistakes to Avoid When Establishing Trusts, Part 1

We’ve been examining adding a revocable (a/k/a living or inter vivos) trust or irrevocable trust to your estate plan. Trust instruments are an important part of your estate plan, particularly if you have a spouse and young children you wish to provide for upon your death. When mistakes are made, in establishing or setting-up a trust, the errors are borne by your survivors.

 

When problems arise in trusts they tend to involve issues with trust funding, policy titling, and beneficiary designations. When neglected these issues have their way of creeping into the lives of your loved one and will require significant amounts of money and time being spent that could have otherwise been avoided. What follows is a primer on the top 4 scenarios your survivors will need to get through to correct any problems associated with trust funding, policy titling, and beneficiary designation.

 

No. 1 – Avoiding probate

The probate process, which must be conducted in each state in which the decedent owned property is costly and timely. Any asset owned by the decedent is subject to probate. Probate can be minimized by taking assets out of your estate and placing them in trusts or by planning for their transfer to family or survivors via will.

 

Generally, assets in a trust are not subject to probate – making trusts very attractive to individuals who want to place their assets in the hands of a spouse, partner, or close family member. The mere creation of a trust does not transfer assets into the trust however. You must take steps to legally transfer assets or property into the trust instrument you created for it to be effective. Trust funding problems may be avoided by making sure that after you create the trust, you transfer the assets that are now managed by the trust.

 

No. 2 – Guardianship court and reliance on financial powers of attorney

When a revocable trust is established, you determine how your assets should be managed and by whom in the event of your disability. If the trust is not funded, meaning the assets do not get transferred into it legally before a period of incapacitation, then the trust cannot be used for the purposes you designate. Any provision in the trust will not apply to those assets. For management of the assets, a guardian will need to be appointed by a court and an agent designated under a financial power of attorney, if one is not already part of your estate plan. 

 

If the person with the financial power of attorney is someone you already designated, the estate plan will kick in and that individual will manage your financial affairs while you are incapacitated. If there is no financial power of attorney in place however, the court will appoint a person and that person may not be the individual you desire to run your financial affairs.

 

The best protection for the management of assets is by trust, not a financial power of attorney, because the trustee will owe special duties to you to manage the assets and income according to how you specified in the trust document itself.   

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