Top 10 Mistakes When Setting Up a Living Trust

A living trust is a legal arrangement that, among other things, allows your estate to pass to your heirs after your death without going through the probate court.

A person, called the grantor, sets up a trust and transfers their assets into it, essentially by changing the title from their name to the trust's. The grantor names a trustee to manage the assets in the trust for the benefit of the grantor's heirs, who are called the beneficiaries. A successor beneficiary is someone who will get control of whatever is left in the trust after the beneficiary dies.

At least initially, the grantor can serve as the trustee. The grantor can name someone else as successor trustee, who will manage the trust if the grantor dies or becomes incapacitated.

A living trust avoids the need for an estate to go through probate, which saves time and probate expenses and keeps the details of your estate private. Probate, by comparison, is a public process. A living trust generally does not reduce income or estate taxes. A living trust can be revocable, which means the grantor can change or undo it.

It costs money to set up and maintain a living trust. For some people, especially with smaller estates, the benefits of a living trust might not exceed the costs. There are other ways to avoid probate besides a living trust.

Legal will vs. living trust

If you have a will, you may wonder why you should bother with a revocable living trust. You might not know what it is, how it differs from a will, or why you should care.

A will is a document that states who will get what when you die. It goes into effect after your death. It can stipulate who you want as legal guardians for your children in the event both you and their other parent die before they reach legal age.

A will requires probate. Probate is a court procedure in which a judge must decide if the document is valid, and this can be a lengthy and costly process. In contrast, a revocable living trust goes into effect as soon as you set it up.

What does a living trust do?

But what exactly does a living trust do? Basically, it takes over the title, meaning ownership, of everything you put into it. If you put nothing into it, it is empty and therefore pointless.

You will want to sit down with your attorney and go over any assets you may want to transfer to the trust. You will have to remove your name from the title of any assets, and replace it with the name of the trust. Some assets you may want to consider are savings accounts, real estate, and stocks and bonds. But you probably won't want to include any retirement savings like a 401(k) or IRA.

That sounds like a scary thing to do, but it's not. As the grantor, the creator of the trust, you will make yourself the trustee; you will still be the one making all the decisions about your assets. You will also be the beneficiary—the one who benefits from the assets of the trust.

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So why go through all the trouble and expense to set up a revocable living trust? The main reason is that when you die, the owner of all of your assets has not died. The trust owns your assets, not you. Control of any assets left in the trust will be transferred to the successor beneficiary.

There is no probate necessary. The successor beneficiary will sign a deed transferring control to him or her. Since there is no probate, the courts will not get involved, making the process much quicker and less expensive. Your assets will not become a matter of public record.

Living trusts for married couples with children

A revocable living trust can be customized to accommodate complicated issues, such as children from multiple marriages, so you can be assured that all assets will go right where you want them to.

A simple revocable living trust does not generally have an effect on taxes. However, if you have a lot of valuable assets, you can set up a more complicated revocable living trust that could reduce the amount of estate tax that would be owed upon your death.

Called an AB Trust, it is designed for married couples with children. In a nutshell, it works like this: The spouses leave property to each other, in trust, for life. The children become beneficiaries, for life. While it saves the couple money, eventually somewhere down the line someone will be taxed on it.

A revocable living trust won't protect you from creditors. If a creditor sues you and wins, they can still go after any assets you have in the trust. If you die owing creditors, they can go after your successor beneficiary to sell any real estate to pay them back. Even though your assets are generally not a matter of public record, real estate is.

While a revocable living trust costs more to set up than a will, it is definitely something that makes a lot of sense. Consider the possibility that you need a will and a living trust.

Top reasons why you need a living trust

Bypass probate. A major reason people use living trusts is to avoid the lengthy legal process of having your property pass through probate court before it reaches your heirs and/or those listed in the will.
Privacy. A living trust can also make private the distribution of some property that would otherwise be publicly available if passed through probate court.
Reduce estate taxes. In certain instances a trust can save taxes, specifically estate taxes where the property is owned by the trust and not the heir and/or beneficiary. Nevertheless, the beneficiary can still have access and entitlement privileges to the property in the trust.
Compassion. Grieving can be tough enough and on top of that dealing with the funeral process doesn't make things easier. By creating a trust, an individual can reduce the burden of death for loved ones.
Simplification. Dealing with probate court can be complicated and daunting. The trust simplifies the process by identifying trustees who become the executors of the will following the death of the primary trustee.
Personalization. By creating a living trust, you can keep your property matters within family and/or friends as you choose. This makes managing an estate a more personal and close-knit process. A living trust may also protect you while you are alive, should you become incapacitated.

A living trust may or may not be worth consideration depending on your circumstances. Whether you choose to use one or not is a personal decision. There may be certain personal reasons, family-related issues, or professional reasons you may want to set it up. For complicated trusts, an estate planning attorney should be consulted.

Top 10 mistakes made when setting up a living trust

A living trust that is drafted incorrectly can be difficult to fix. Avoid the following major mistakes when drafting one:

1. Not understanding your state’s probate process and fees

In some states, such as California, probate fees are high. This means that having a will might make more sense than having a living trust, depending upon your state of residence.

2. Not adequately protecting all assets

If any of your assets are not included in the original drafting of the living trust, these assets could be subject to regular probate procedures upon your death. Make sure that all assets are included in your living trust.

3. Assuming that a living trust takes the place of a will

It may be beneficial to have a will in place, even with a living trust. If you have property that does not make it into your living trust—for example, property that you acquired right before death—that property can be covered by your will. The backup will can identify who should get any property that has not already been left to another person or entity.

With no backup will, property that is not covered by the living trust will be distributed according to state law.

4. Assuming your trust will help you avoid estate tax

A basic living trust, established to avoid probate, may not help you avoid taxes. However, complex living trusts, such as the AB trust, can help you save federal estate taxes. The AB trust (also known as the credit shelter trust, marital life estate trust, or marital bypass trust) is designated for married couples who have children. Parents transfer assets to each other, for their lifetimes, in trust. Then assets are transferred to the children.

5. Trying to draft your trust without help

While do-it-yourself options are available for drafting living trusts, the living trust is a complex legal document. A simplified living trust that you fill out yourself may not adequately provide for your heirs. It may be tempting to save time and expense, but it's worthwhile to hire an experienced lawyer to draft your living trust.

6. Hiring a lawyer with little or no estate planning or living trust experience

It may be useful to research the lawyer who will help you draft your living trust. Some issues that might be important to research are the law firm’s specialty and the length of time the firm has been preparing wills and living trusts.

7. Letting the cost dissuade you

Living trusts can cost three to five times more than preparing a will. It is important to consider if the long-term savings and benefits outweigh initial costs. Consult your lawyer and consider all factors in making this decision.

8. Failing to consider your age or health

If you are young and have not yet accumulated many assets, a will may be more appropriate for you for now. Similarly, if you are healthy, and incapacitation or progressive disease is not a concern, a will may be more suitable for you. If you want someone else to take over the trust management duties should you become incapacitated, you will need to arrange for this. Consider asking an estate attorney if the time and expense of keeping a living trust up to date is right for you.

9. Failing to consider the amount of your assets

If your estate includes assets such as property in more than one state, a living trust may prove more beneficial than a will. If your assets exceed a certain amount, a living trust may be the best route in your estate planning.

10. Failing to consider family dynamics when choosing between a trust and a will

A living trust may be the appropriate choice when deciding that assets should go to your children from a previous marriage rather than to your stepchildren. Using a will and going through the court and probate process may be the best route if your family requires the guidance of probate court when assets need to be distributed.