When setting up a revocable trust, you need to be diligent about asset transfers, beneficiary designations and funding formulas. Failure to complete certain steps can prevent the trust from acting as you intended, creating additional cost and unintended consequences for your estate.
Common issues include the following:
Failure to transfer assets
Setting up a trust is just the first step. You must accurately transfer assets into the trust in order for its proper function to take effect. If assets are not transferred into a trust, they will still be subject to public probate court on your death.
Failure to update beneficiary designation
A trust will commonly include accounts with beneficiary designations, such as retirement accounts and life insurance policies. Failing to transfer beneficiary designations to the trust could have unintended consequences; for example, someone might get more or less than you intended, or get access to funds sooner, and with less control by you, than you wanted.
Failure to adjust for current tax law
If you executed your trust documents a while ago, when the estate tax exemption was significantly lower, you need to review your plan to ensure you’re still getting the intended results.
Older estate plans commonly use a formula funding clause to divide assets between a credit shelter trust and the surviving spouse.
However, because the Tax Cuts and Jobs Act doubled the estate tax exemption, trusts using these old formulas may have the unintended consequence of disinheriting the spouse.
Be aware that the current federal tax exemption is set to expire in 2025; without new federal action it will revert to $5 million. Talk to your estate planner about updating your current trust documents and make plans to review them regularly.