Although a Last Will and Testament is likely the cornerstone of your estate plan, you will also probably incorporate additional estate planning tools and strategies into that plan to ensure that all your goals are reached. Many people, for example, include a trust in their estate plan. The best way to ensure that you do not make any mistakes with the trust you create is to work closely with an experienced estate planning attorney. In addition, the Grand Forks trust attorneys at German Law explain some of the most common trust mistakes and how you can avoid making them.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Trustor (also referred to as a Maker or Grantor), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. Most people enter into trust agreements on a daily basis without realizing it. For example, imagine that you ask your Aunt Sally to hold onto some money while you are out of the country for several months and to only use the money on expenses your nephew has while you are gone. You probably would not look at the arrangement as a trust, but you created a trust wherein you are the Trustor, Aunt Sally is the Trustee, and your nephew is the beneficiary of the trust.
All trusts fall into one of two broad categories – testamentary and living trusts. A testamentary trust is one that does not take effect until the death of the Trustor and is usually triggered by a provision in the Trustor’s Last Will and Testament. A living trust, formally known as a “inter-vivos” trust, is a trust that takes effect during the lifetime of the Trustor. Living trusts can be sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Trustor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Trustor at any time nor for any reason once the trust is active.
Mistakes People Often Make When Creating a Trust
- Choosing the wrong type of trust. Trusts have evolved to the point where there is a specialized trust that can be used to further almost any estate planning purpose. Selecting the correct specialized trust helps ensure that your goals are met. Even the general type of trust you choose, however, makes a big difference. For example, if asset protection is your goal, you must use an irrevocable living trust. Assets held in any other type of trust remain accessible to creditors and other threats.
- Failing to state a clear and concise trust purpose. Your Trustee is legally required to make all discretionary decisions with your trust purpose in mind. He/she is also required to administer the trust with the goal of furthering your trust purpose. Deciding on a clear and concise trust purpose, therefore, is critical.
- Appointing the wrong person as Trustee. A common mistake is appointing a spouse or close friend without giving much thought to whether he/she is really the best person for the job. Choose someone with the legal and/or financial skills necessary to properly administer the trust.
- Underfunding the trust. If all goes well, your trust will grow as the principal is invested; however, you should always ensure that there are sufficient assets in the trust from the beginning to accomplish your stated goals.
- Vague or conflicting terms. If you are not the Trustee or your trust, (or even if you are but you later die or become incapacitated) someone else will be charged with administering the trust using the trust terms you create. If those terms are vague or conflicting, your Trustee will have problems administering the trust and may end up in court asking a judge to interpret the terms. Court intervention is costly which is why you need to make sure your trust terms are unambiguous and harmonious.
Contact Grand Forks Trust Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about trusts, contact the Grand Forks trust attorneys at German Law by calling 701-738-0060 to schedule an appointment.