When asked about an estate plan, clients often say: “We’re all set, we have a living trust.” And that’s good. Often having a living trust (a.k.a. revocable trust) suggests that the client has worked with an attorney on a suitable plan. But what I also find is that clients sometimes think that simply having created a trust means they won’t have any problems later. That’s not necessarily true. If you have a trust, you should also consider these issues:
Is it fully funded?
One reason people want trusts is to avoid having the court involved in the settlement of their estate. This works provided the property they own is titled in the trust, or set up to pass to the trust through beneficiary designations at their death. All too commonly, people create trusts and fail to transfer all their assets to the trust when it is created, or subsequently acquire assets that are not held in trust. The result is that, when they die, a probate estate must be opened in order to have the property transferred to the trust so it can be distributed under the terms of the trust.
Are loans forgiven or offset?
For better or worse, parents often loan money to their children. When parents die, and the children are dividing the estate, few things create more conflict than some of the children having to inquire of other children about the money they owed their parents and how that will be handled in the division of the remaining assets. Inevitably, the child who borrowed the money will explain that it wasn’t a loan, it was a gift, and family relations go downhill from there. One way or another, parents should address money they have loaned to their children and either expressly state in their trust that such loans are forgiven at death and are not to be offset against a borrowing child’s share, or that they should be offset. Where the decision is made to offset loans to children, the trust needs to state the amounts of the loans, or provide direction to the trustee that will allow them to determine the outstanding balance on the loan at the time of death.
Is the trust coordinated with the power of attorney?
One important part of modern estate planning is anticipating and planning for periods when the client will be alive, but unable to manage their own affairs. For people who create trusts, this involves the role of the successor trustee as well as the individual appointed as agent under a financial power of attorney. The trustee is in charge of assets titled in the trust, and the agent is in charge of assets outside the trust. Because many assets, including most retirement assets, cannot be titled in the trust, it is often the case that the activities of these two fiduciaries need to be coordinated in order to effectively manage the affairs of the impaired person for whom they are acting. Even if the same individual is named as successor trustee and agent under the financial power of attorney, unless the documents are written in a way that clarifies the relationship between these two roles, problems can occur during those critical periods when decisions need to be made.
Are beneficiary designations and joint ownerships consistent?
People sometimes have trusts, but also use beneficiary designations on some assets, or hold some assets jointly with others. This may be a good idea, if the intent is to provide certain beneficiaries with assets above and beyond what the trust provides to them. But if the dispositive provisions of the trust are intended to reflect the entire estate plan, passing assets outside the trust directly to some beneficiaries, may throw off the plan. So, for instance, if I have three children and my trust divides my estate into three equal shares at my death, but I name one of my children as beneficiary on a retirement account, unless the trust includes language to offset the value of that retirement account against that child’s share, that child will receive more than the other two.
Have life changes altered the landscape?
People live so long these days, and everything changes over time – often in ways we would not expect. When people create a trust, leaving their assets to, for instance, what are then adult children all in good health and stable jobs, they may not anticipate that in thirty years those children may be disabled, or dead, or going through bankruptcy or divorce. Leaving assets outright to people who are getting some government benefits, or who have creditor issues, may do more harm than good, causing them to lose eligibility for government benefits, or causing their share of the trust to be consumed by their creditors. While trusts can be drafted to anticipate some of these situations, it is also true that terms of the trust should be revisited periodically to consider how life’s surprises may have impacted decisions that made sense at the time the trust was first created.
Did you appoint a problem trustee?
One of the things people often struggle with the most when creating a trust is picking the person or entity that should serve as trustee of their trust when they die or become incompetent. Fights between siblings, when the one who is serving as trustee is overly controlling and self-serving, are among the most common sources of problems in settling estates. Appointing more than one of them to serve may be a solution, in some cases, or it could just make matters worse. Naming a professional fiduciary, like a bank, is another option; but that’s not always what clients are comfortable with. As with other issues, as life passes, we begin to see better (or become more realistic) about our children and their relationships with one another. In looking at whether our trust will run into any problems in the future, we should periodically reconsider the people we have selected to manage our affairs, and whether their personalities are suited to the job. Fear of offending a child by replacing them as successor trustee should not be a reason to leave them in that position, where it is reasonably foreseeable that doing so will only result in bigger problems in the future.
Clients who have living trusts in place are applauded. But they should not assume that by simply creating a trust, they have assured themselves that everything will go smoothly upon their incapacity and/or death. Rather they should revisit their documents periodically, and consider the issues addressed above.