Common Mistakes with Living Trusts

At Galligan & Manning, we are fans of using trusts in estate plans.  Trusts are versatile, you can accomplish incapacity planning, probate avoidance, tax planning, asset protection and more with trusts.  However, it’s true, as with all planning, that things don’t always go as intended.  Sometimes people make mistakes with living trusts, and although the trust is still a good plan, it doesn’t create all of the benefits intended.  Yahoo Life’s recent article entitled “Why You Should Put Your House in a Living Trust” explains some of the biggest errors people make with trusts.  However, take that article with a grain of salt, there are a few things I disagree with that I’ll mention later.

First, remember that a trust is a fiduciary relationship in which one party (trustor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiary).  In living trusts, this is frequently the same person, at least during their lifetimes, and then there are new individuals to take over as trustee and beneficiary once something happens to the trustor.

Trusts are created for the reasons I mentioned earlier.  Most people ask about them because they want to avoid the probate process.

Also remember that although trusts are generally associated with the wealthy, almost everyone can use them as many people benefit from them.  I personally think they are associated with the wealthy because high profile deaths often reference trusts.  So, if a very wealthy person passes, say Steve Jobs for example, there will be stories talking about his wealth and how it passed by use of trusts.  His lawyers used those trusts for the benefits I mentioned above, but people only hear about it in high profile cases, so they assume that’s what they are for, not realizing everyone can use them.

All that said, if you are using a living trust, here are a few common trust mistakes to consider:

Failing to retitle your real property.  If you own a home, other land, mineral interests, etc, then transferring it to the trust or arranging for it to transfer to your trust at your death with a lady bird deed or transfer on death deed is very important.  If you don’t, probate may be necessary to gain control of the property and transfer it to your trust.

As a note, the Yahoo Life article is incorrect here and when they mention telling your mortgage company of a transfer.  Transferring your owner-occupied primary residence to your revocable living trust does not trigger a “due on sale” clause in the mortgage.  The Garn-St. Germain Act of 1982, which is a federal law governing mortgages, prohibits that.

Failing to trust fund.  Most clients like the idea of avoiding probate.  However, it is important to recognize that the trust itself cannot collect assets for you.  If you have a bank account with your name on it and nothing else addressing title during life or at your passing, the trust isn’t the owner.  The trust WON’T become the automatic owner at your death.  Instead, the probate of will becomes necessary.  This too is an easy thing to address as part of proper estate planning, but sometimes I hear clients say “it’s just a little bit, no big deal.”  I assure you your beneficiaries will not agree.

Failing to tell the insurance company of ownership change. Be sure to tell your home insurance company about retitling to a trust. If not, the insurance company may deny your claim in an event because the actual property owner—your trust—wasn’t insured.  This is seldom is serious problem, but is easy to overlook.

Don’t make these trust mistakes. Work with an experienced estate planning attorney to ensure you are getting the most value you can out of your trust.

Reference: Yahoo Life (Jan. 10, 2022) “Why You Should Put Your House in a Living Trust”

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Should I Use a Corporate Trustee?

Recently, a client decided to include a corporate trustee as part of their estate plan.  When discussing the matter, they were surprised at how affordable they can be, and that they were glad they choose that route.  Thinking of that conversation and how important it is to name a proper trustee, I wanted to highlight some benefits of corporate trustees.

The Quad Cities Times’ recent article entitled “Benefits of a corporate trustee” warns that care should be taken when selecting someone to serve in this role. Now, many clients have loved ones in their lives who are capable of serving as a trustee or other fiduciary, but for some, family members may not have the experience, ability and time required to perform the duties of a trustee. Those with personal relationships with beneficiaries may cause conflicts within the family. You can name almost any adult, including family members or friends, but think about a corporate or professional trustee as the possible answer.  I also covered how to choose a trustee here:  https://www.galliganmanning.com/how-to-pick-a-trustee/

Here are some reasons to use a corporate trustee:

Experience and Dedication. Corporate trustees can devote their full attention to the trust assets and possess experience, resources, access to tax, legal, and investment knowledge that may be hard for the average person to duplicate. It’s their job and they hire professionals with backgrounds in these areas.  Many people who choose a corporate trustee do so for this reason.

Relative Cost.  This may seem a strange reason to consider a corporate trustee.  Most people don’t consider them at all because professionals will charge fees to serve.  However, trustee fees are often regulated by law or by the trust document.  Both individuals such as family members, and corporate trustees might only be able to charge the same rate.  Given the fact the trust might pay your middle child and an office of professionals the same rate, that isn’t a bad deal.  Further, corporate trustees sometimes take assets under management.  This means they would invest your assets for you, and therefore make money on the investments like a financial advisor does.  If they do, they often include those fees at a reduced rate when serving as a trustee.  This means you actually save money in the end.  It is also possible that they don’t take money under management so that your investment advisor can continue to invest the funds if that’s your preference.

Successor Trustee. If you choose to name personal trustees, you may provide in your trust documents for a corporate trustee as a successor, in case none of the personal trustees is available, capable, or willing to serve. Corporate trustees are institutions that don’t become incapacitated or die. You should consider the type of assets you own and then choose the most qualified trustee to manage them.

Middleman.  Clients sometimes struggle to admit to their estate planning attorney that their families don’t get along.  They don’t want to talk about how a child of theirs struggles with addiction, is dependent on them for support or otherwise would be difficult for a family member trustee to deal with.  In that situation, corporate trustees have the benefit of professional detachment.  The beneficiary can be as angry with them as they want, and the anger won’t be directed to one of your loved ones.  This can make professional trustees an attractive middleman or wall between a difficult beneficiary and the rest of the family.

In sum, many estate owners can benefit from the advantages of a corporate trustee.

Ask an experienced estate planning attorney when working on a trust about naming the appropriate corporate trustee, and the advisability of including terms for your registered investment advisor to manage assets for your trust.

Reference: Quad Cities Times (Nov. 28, 2021) “Benefits of a corporate trustee”

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Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://www.galliganmanning.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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