Two Common Mistakes with Trusts

October 1, 2017

irrevocable trustTrusts are incredibly useful tools. But, not ever trust will fit every circumstance. Trusts must be used appropriately.  Here are two common mistakes with trusts and how they can be easily avoided.

Mistake #1:  Using the Wrong Type of Trusts

The first mistake with the use of trusts is not using the right type of trust. There are many different types of trusts. By far the most common type of trust is a Revocable Living Trust, often just called a "Living Trust" or “RLT.” A Living Trust is a great solution for most estate planning situations. It can provide for management of your estate during incapacity, avoid probate at death, and protect your beneficiaries' inheritances from divorce, creditors, and taxes. But, it may not be the right solution for every situation.

Irrevocable Trusts and LLCs - Great for Tax Planning and Asset Protection

Additional estate planning must be done if one wishes to do more than address incapacity and death. Some clients are at higher risk for lawsuits (e.g. doctors, lawyers, etc.) and want to do additional planning to protect their estate from potential lawsuits.  Even more often, clients own rental properties where a slip-and-fall accident could take everything away from them and they want to protect their investment.  For the few clients that may be subject to the estate tax, planning needs to be done to minimize the estate tax burden, or potentially to eliminate taxes altogether!
Such additional planning is often done through the use of an irrevocable trust and/or limited liability companies (LLCs).  An Asset Protection Trust can limit a creditor's rights to certain assets when done properly.  In order to protect part of the estate from such creditors, the irrevocable trust must be set up years before the potential creditor has a claim against the estate; an Asset Protection Trust cannot hide assets from current creditors. For landlords, an LLC can be an extremely effective way to protect an accident on a rental property from taking away personal assets (e.g. your home, bank accounts, etc.).  For estate tax planning, attorneys will often use myriad trusts to minimize or eliminate the tax impact of someone's death, whether through an Irrevocable Life Insurance Trust ("ILIT"), a Charitable Trust, or Gifting Trusts, to name a few.
Whether you are the attorney or the client, consider what type of trust is appropriate. Each type of trust has its strengths and challenges. The key is choosing the right type of trust for the situation.

Mistake #2: Trusts and Funding (or the lack thereof)

The second mistake with the use of trusts is not funding the trust properly. A Living Trust is a great tool, but only if it is has legal ownership of the assets it is designed to manage (a.k.a. "funding," or the process of transferring legal title of the estate into the Trust). If a Living Trust is not properly funded, your successors will have twice the amount of work to deal with upon your death. If there is a Pour-Over Will (and there should be!), the assets that were not funded into the Trust would be subject to probate and only then would be distributed to the Living Trust. Once funded by the Probate Court, the assets must then be distributed according to the terms of the Living Trust.  This is doing similar work TWICE! Worse yet, if there is no Will the unfunded assets would pass pursuant to "intestacy” laws, under which the remaining assets will pass to your next closest living heirs according to state law, irrespective of anything you've done in your estate plan. A Living Trust should be funded appropriately to maximize its usefulness during incapacity (to avoid needing a conservatorship) and death (to avoid a probate).
If you have questions regarding Living Trusts, asset protection, tax planning, or any other estate planning matters, please contact the experienced attorneys at Anderson, Dorn & Rader, Ltd. for a consultation. You can contact us either online or by calling us at (775) 823-9455. We are here to help!

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