Have you been considering establishing a trust as part of your estate plan?
Trusts are often overlooked and under-appreciated in the big picture of estate planning. Most people focus on a will, yet wills are not a silver bullet. They are simply an estate planning tool, which means that they have a clear purpose and some limitations. The function of a will is to tell the executor of your estate how you’d like your assets to be passed on to your heirs. However, wills can be challenged during probate. That could tie up your estate for months or longer. In addition, wills don’t offer financial protection for minor beneficiaries.
At SYM Financial, we work with attorneys to help clients understand and document their personal wishes for the future. In the course of that work, we see many misconceptions and a lot of confusion when it comes to trusts. The most common one is that trusts are just for wealthy families. That is not the case. In fact, anyone with a net worth of at least $100,000 should consider creating a trust. Trusts can also be useful in capturing specialized instructions that are tailored to your family’s needs.
“Trusts can typically do anything you want them to do — as long as those purposes are not illegal or immoral,” shared SYM senior financial advisor Rick Harrison. Trusts can be a great way to control how assets are eventually distributed to minor children. The designated trustee will care for your assets on the children’s behalf until they become adults and can take ownership themselves.
As beneficial as they are, trusts can also be complex. It’s important to know how your trust works and what actions you need to take to put it into place. If you want to have the peace of mind knowing that your wishes have been captured faithfully and are legally binding, read on to avoid three common mistakes while setting up a trust — and be sure to work with a trust financial planner and an attorney.
Mistake # 1: Setting Up the Wrong Type of Trust
There are two big categories of trusts: irrevocable trusts and revocable trusts.
An irrevocable trust is one that cannot be changed once it’s created. After you transfer assets into an irrevocable trust, those assets no longer belong to you. Irrevocable trusts are often used for estate tax or liability reasons (such as a Medicaid trust).
Revocable trusts, on the other hand, can be changed at any time. They also allow you to remain in control of your assets while you’re alive. After you pass away, your assets transfer to the trust, and your designated trustee distributes them directly to your beneficiaries to sidestep probate.
In order for this to happen, the trust must be properly established — and properly funded, too.
Harrison reminds us, “A lot of people make the mistake of spending thousands of dollars on having an attorney prepare their estate plan, yet never allow those documents to be put to work for them. Don’t invest in a stack of nicely written documents that sit in a drawer and gather dust. The key to making your trust do what it is supposed to do is to title your assets to it — or designate the trust as your beneficiary.”
Mistake # 2: Not Updating Trust Terms and Beneficiaries
“Set it and forget it” does not work for trusts. After your trust is written, you want to review it periodically to make sure it doesn’t need a change.
There are several life circumstances that could change between now and the time you eventually pass.
- You and your spouse might have children or adopt.
- You might get divorced, become widowed, or remarry.
- Your minor children could grow up to become adults.
- Your children might get married, divorced, or have children of their own.
- Your children could develop a substance dependency or get into financial issues where it might be best to limit their benefits to a specific amount per year.
No matter what happens, you don’t want the instructions in your trust to become mismatched with your current life situation. This is why it’s important to periodically review your trust and ensure it still accomplishes the objectives you want it to.
At SYM Financial, working alongside attorneys, we have seen trusts put into place 10–15 years earlier that mention one child of the couple — but not another. This can happen when a trust is written before the birth of the second child and never updated.
It is a good idea to review estate and trust documents every five years or after a major life change. You should also consider how they might be impacted if estate tax laws change.
Mistake # 3: Choosing the Wrong Trustee
A trustee’s responsibility is to carry out the instructions that were dictated in the context of the trust. As the name implies, your trustee should be someone that you “trust.”
“Choose somebody who is detail-oriented and has good skills when it comes to managing money,” recommends Rick Harrison. “At the same time, choose someone who understands your personal values and will emulate the decisions you would make if you were still alive.” In other words, avoid anyone who might have a potential agenda or who you suspect could abuse this position.
Most people name a surviving spouse or another family member as the trustee (such as a sibling or one of their adult children). However, it’s important to remember the person you choose could become overwhelmed. Being a trustee is an honor — and often requires a lot of work to navigate while the trustee is dealing with their loss at the same time. That’s why some families choose to have a corporate trustee (such as a company or a bank) somewhere in the line of succession.
And if you do select a family member, be sure to have a conversation with that person ahead of time. Ask them if they would be willing to act as a trustee. Explain what the position would entail. This conversation can save everyone a lot of wasted time and headache.
3 Common Mistakes in Establishing a Trust
So, understand the difference between revocable and irrevocable trusts, be sure to review the trust periodically to update beneficiaries, and choose the right trustee.
And finally, after all that is said and done, don’t forget to sign the documents. Your trust won’t be legal until the documents have your signature. Even if your state doesn’t require it, it is a good idea to sign the papers in the presence of a public notary.
If you’d like to know more about trusts and how they work, SYM Financial Women’s Initiative is hosting a free conversation on October 21, 2021 at Proximo. Join us as SYM financial advisor Michelle Hipskind and attorney and trust expert Lindsay M.L. Koler discuss trusts. Whether your goal is to avoid probate, set up a special needs trust, or just get your arms around what a trust is and when it can be useful — sign up, and be sure to invite a friend. This is a discussion lead by women for women. Follow this link to learn more about the event and register.
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.