Common Living Trust Problems
Most living trusts (also known as revocable or grantor trusts) have two administrative phases. In the first phase, you administer the trust. In the second phase, after your death, the named trustee takes over its administration. In this way, the trust is a contractual relationship established between you and the trustee who is charged with managing it.
The legal processes the trustee faces can be complicated. Failure to administer correctly can expose the trustee to liability for damages to your estate. Common trustee tasks include notifying beneficiaries, compiling and providing inventories of trust assets, and listing all assets titled in the trust’s name with each asset’s market value.
To assist your future trustee, take these important steps when setting up your living trust:
- Fund your trust. Ensure that your trust is funded by transferring ownership of your assets from your name to the trust’s name. Assets still titled in your name at the time of your death will have to be probated.
- Name a beneficiary. A viable trust agreement requires at least one beneficiary. Should a beneficiary pass away or become incapacitated after the trust’s creation, you must amend the trust accordingly. Without updates, the trustee might need court direction.
- Protect beneficiaries. Draft your trust to shield beneficiaries from lawsuits or divorce. This can help safeguard assets from creditors or divorce proceedings that may affect your children or grandchildren.
- Choose a trustworthy trustee. Select a trustee you trust to follow your wishes and fulfill their fiduciary responsibilities faithfully. It’s also important to designate at least one successor trustee. The initial trustee may prove unsuitable or otherwise unable to do the job. Having an alternative ready will smooth the process for all involved.
- Document the trust. It’s crucial to have your trust in writing. Oral agreements, even among family and friends, are not legally binding, particularly for trusts involving real property.
- Provide specific directions. Clearly state the conditions under which distributions should be made to beneficiaries or on their behalf. If the trustee has discretion over distributions, misunderstandings and disputes can arise, with beneficiaries potentially believing they are entitled to distributions that the trustee deems inappropriate.
- Include a pour-over provision in your will. Incorporate this clause into your will to ensure any remaining assets transfer to your trust upon your death. Without it, assets not already in the trust will need to go through probate, potentially leading to improper distribution.
- Regularly review your trust. Annually review your trust to ensure its terms still reflect your estate planning goals and adjust as necessary.
The difference between trusts and wills
Trusts and wills are both legal documents that convey how to distribute your assets after your death, but they differ in when they take effect, whether the assets will go through probate, who manages your assets and when assets will be distributed.
Like a will, the validity of a trust can be challenged on various grounds — due execution, lack of capacity, undue influence, fraud and duress. It’s also not uncommon for beneficiaries to allege that a trustee hasn’t properly handled trust assets, has failed to properly maintain trust property or hasn’t communicated adequately. Because trustee duties are so complicated and the stakes for failing to properly administer a trust are so high, it is a good idea to consult with a trust lawyer when drafting a living trust.
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