A revocable or “living” trust can be a great way to avoid probate, manage your assets if you become impaired, and protect your family’s privacy. If you have one, it’s a good idea to review it every few years to make sure that it still meets your goals and is up-to-date with the law.
The most important questions involve which assets are in the trust and what will become of them if something should happen to you. But there are a lot of other factors to think about that can also be very important for your estate plan. Here are some common issues and problems with living trusts that you might want to consider:
1. Do you have the right successor trustees? Typically, you’ll be the trustee of your own living trust, and if you’re married, your spouse might be a co-trustee. But it’s good to name successor trustees in case you or your spouse pass away or become incapacitated. Have you done so? If so, are the people you named still the best people to manage your affairs? Do you want one of them to begin acting as a trustee now? If you and your spouse are co-trustees, do you want a successor to step in when the first of you becomes incapacitated, or not until neither of you can serve?
2. Can your heirs remove a trustee? Do you want your heirs to be able to remove a trustee after you pass away? This can potentially be helpful if there are communication problems or disagreements with a trustee. On the other hand, some heirs might take advantage of this provision by installing a “puppet” as trustee who will ignore your wishes and do whatever they want.
3. Can your spouse change the distribution of assets after your death? Many trusts give a surviving spouse the right to change the way that assets are distributed. This can be helpful to provide flexibility in responding to changes in family circumstances. However, in one recent Massachusetts case, a wife used this power to give everything to her children from her first marriage, and nothing at all to the trust’s original beneficiaries (her deceased husband’s own children).
Of course, even if a spouse doesn’t have children from a previous marriage, there have certainly been cases where a surviving spouse has later remarried and become estranged from the rest of the family.
4. Does your trust protect children from lawsuits and divorce? You have the option of having your trust continue during your children’s lives, so the assets in the trust will be protected if your children are sued, incur large debts, or get divorced.
5. Have you funded the trust? It’s not uncommon for people to set up a trust and then forget to re-title their assets so they are included in the trust. But this mistake can destroy all the benefits of having the trust in the first place.
6. Have you reviewed your beneficiary designations? A trust should be coordinated with assets outside the trust that have beneficiary designations, such as bank and brokerage accounts, IRAs, 401(k)s, life insurance, etc. These designations should be reviewed every few years to make sure they’re current and coordinated with the trust as part of your estate plan.
7. When do children and grandchildren receive their inheritance? Most trusts provide that assets will remain in the trust until those inheriting them reach a certain age, such as 21. But it’s important to note that not all 21-year-olds are responsible enough to handle an inheritance. You can change this age if you want. You can also provide that assets will be distributed over time. For instance, a third of the assets might be distributed at age 25, another third at age 30, and the remainder at age 35.
8. Is the trust the beneficiary of a retirement plan? While you can choose to have your retirement plan assets go directly to your heirs – and this is often the simplest approach – there can be tax advantages in leaving these assets to a trust, where the tax deferral can be stretched out over many years. However, this requires some very technical provisions in the trust, and it’s important to make sure these provisions are current.
- Is your trust up-to-date for estate tax purposes? Congress and many states have changed the estate tax laws several times in recent years. If your trust is more than a few years old, or if you lived in a different state when it was drafted, it should be reviewed by an attorney to make sure it’s still current and that you’re getting all the tax savings that are available.