Avoiding the Costly Mistakes That Kill Your Estate Plan
Putting together an estate plan is a time-consuming and complicated process. There are many moving parts, and any mistake can be costly. Creating a trust is one of the most common estate planning tools for people with assets to protect. Unfortunately, many people who try to set up a trust fail because they make common mistakes that cost them money. A trust is an arrangement with the help of a third party known as a trustee, which means someone else has control of your assets instead of you. Trusts come in two types: revocable and irrevocable. An irrevocable trust has more benefits than drawbacks when it comes to protecting your wealth during your lifetime and after your death. To set up an irrevocable trust correctly and avoid costly mistakes, keep reading for helpful tips:
Don’t Hire an Unlicensed Advisor to Set up Your Trust.
When you start shopping around for a trust company, make sure they are licensed. In every state, only attorneys and a few other professionals can set up a trust. Getting advice from unlicensed people can cost you money because they’re not held to the same standards as attorneys. Using unlicensed vendors can also lead to a trust with weaker estate protection. Avoid paying extra for the wrong kind of service by conducting due diligence and asking the right questions. If a trust company tries to sell you on any services you don’t need, move on to the next company.
Don’t Confuse a Trust With an Estate Plan.
A trust is only one part of an estate plan, and it’s often the last piece of the puzzle. Other pieces of an estate plan include making a will, setting up an advanced health directive, and possibly putting a health care proxy in place. Many people who hire lawyers to finish their estate plan forget to create a trust. This is a common mistake that can be avoided by making sure your trust is included in your estate plan. Otherwise, the court will distribute your assets according to the state’s intestate laws—not what you would have wanted.
Think Carefully Before Naming Children as Trustees
Putting your children in charge of your assets might sound like a good idea, but it can cause family strife. This can also cause your children to resent your decision, which is a bad way to leave a legacy. If you must name your children as trustees, there are ways to protect them from making costly mistakes and help them avoid temptation. You can require them to conduct trust meetings with themselves at least once a year. Another option is to have them sign a trustee’s affidavit that states they understand their responsibilities and the potential consequences of failing to perform them correctly.
Don’t Forget About Protecting the Assets in Your IRA and 401(k).
If you set up a trust, you need to make sure the assets in your retirement accounts are protected. Otherwise, your heirs may have to pay taxes on the money that would normally be tax-free if you were still alive. When setting up a trust, you can put restrictions on the IRA and 401(k) accounts. If your trust says the money in your account can only be withdrawn every 10 years, for example, your heirs won’t have to worry about paying taxes on the money. They’ll get it as a normal income tax. If you’re not sure how to protect the assets in your IRA and 401(k), consult with a financial planner who specializes in trusts.
Don’t Use Abusive Language in the Trust Declaration.
Putting together the trust declaration, the document that lays out the beneficiaries and the rules for the trust, can be challenging, but it’s where mistakes are most common. You can help yourself avoid costly mistakes by using the correct terminology and avoiding abusive language, even if you’re mad at someone. For example, don’t use terms like “disinherit,” “disinherited,” or “disinheritance” because they’re not legal terms. Instead, use the word “excluded.”
Be mindful of When You Might Need a Trustee to Act Quickly.
A few scenarios could require a trustee to act quickly. For example, if someone challenges your capacity to make decisions, you may need your trustee to show proof that they have the authority to make decisions. It’s a good idea to name a trustee who is willing and able to act quickly when necessary. If you name your spouse, it’s a good idea to spell out that your spouse has the authority to act quickly in the event of an emergency.
Don’t Let Your Emotions Guide Your Decisions.
As you’re putting together your trust, make sure your emotions aren’t clouding your judgment. You have to be realistic about what you can put in the trust and what you can’t. Make sure to follow the law. You also have to be prepared for the fact that some people may not get what they want out of your trust. You can’t let emotions make your decisions for you. If you do, you could end up regretting those decisions and losing a lot of money.
Overall, be Diligent and Have a Plan Before Making any Decisions
When you set up your trust, you’ll be making a lot of decisions. You’re naming beneficiaries, naming a trustee, deciding how long the trust will last, and even deciding who can borrow money from the trust. If you make rash decisions or aren’t thorough in your research, you could end up making mistakes that cost you thousands of dollars. All the mistakes listed above can be avoided with diligence and a plan. Before you make any decisions regarding your trust, research what your options are carefully and choose what makes the most sense for you. Your lawyer can guide you in making the right choices for you depending on your age and your circumstances. These can change over your lifetime.