Five Mistakes People Make in 2023 When Setting Up a Living Trust
The Five Mistakes People Make When They Create & Maintain Their Revocable Living Trust-Based Estate Plan.
So many people in America establish a RLT based plan so that when they pass away, their remaining assets can be distributed to their heirs or beneficiaries outside of the court and attorney-involved probate process. The idea is that when assets are in your name when you pass away, those assets will be frozen and your survivors must use your will, hire attorneys who prepare various rounds of court pleadings, and a judge oversees the management and settlement of your estate. Assets in the name of your living trust avoid the court process when you pass away - the successor trustee or co-trustees that you designate in your living trust instrument can immediately disburse your trust assets to your trust beneficiaries without court and lawyer involvement.
But mistakes do get made when people establish their living trust plan. Here’s five common and uncommon mistakes:
The Distribution Schedule:
For those wanting their survivors to avoid probate, it’s not only establishing a RLT that is important, but also making sure the distribution schedule written into your trust is in accordance with your wishes. For example, let’s say a married couple wants to establish a RLT to avoid probate. They have some important decisions to make regarding what happens when each of them passes away. For example, when the first spouse dies, will the surviving spouse then be able to control the disposition of the entire trust, thus, excluding the children of the first spouse to die. Or, will the assets of the first spouse to die be placed in an irrevocable trust so that the surviving spouse cannot divert those assets to other people.
The Ancillary Docs:
Virtually everyone who establishes their RLT-based estate plan also has a number of other legal instruments put in place. From the pour-over will which directs that any assets in the name of the trustmaker at the time of the trustmaker’s death be poured over into the trust through the probate process. Other ancillary estate planning documents include, but aren’t limited to, durable powers of attorney, heath care legal documents, which, depending on your state of residence, could be referred to as an AHCD or a health care proxy or health care power of attorney. These health care documents will likely include your wishes regarding the withholding or withdrawal of life-sustaining procedures in the event you are in a profound vegetative state with no chance of recovery.
Trust Funding:
The effectiveness of your survivors’ avoiding probate is based largely on whether your trust is funded. Having a trust funded means that title to your assets must be transferred to your trust during your lifetime - before you pass away. So for examplose, let’s say you own a home when you establish your trust. You figure that your kids will want to sell it after you pass away. In order to keep your kids from the expense and delay of having that house go through probate when you die, you transfer title to your house during your lifetime from your name to your name as trustee of your RLT.
Nonprobate assets:
While people often put great time, effort and expense into the customization of their living trust, they often mistakenly ignore providing for the proper disposition of their “nonprobate assets.” For example, an individual may transfer their $500,000 home and their $750,000 brokerage account to their trust because they want those assets to remain in trust after they pass away for their spouse and children. However, they neglect their $3M life insurance policy. They may need to name their living trust as the beneficiary of their life insurance policy, but they often neglect to because they realize this is a nonprobate asset. Thus, the $3M will be payed out to whichever individuals are named as beneficiaries on the insurance company’s beneficiary designation form.
No Portability Election:
Now this isn’t something that’s done when a living trust is created, but it is potentially a huge long term tax savings move that must be made within months after the death of the first spouse to die. With the estate tax exclusion amount (currently $12.9M for 2023 scheduled to be cut in half on 1/1/26), it is becoming even more important that the executor or trustee of the first spouse to die make a timely portability election on the federal estate tax return of the first spouse to die, so that the surviving spouse’s estate can utilize not only their own estate tax exemption when that surviving spouse dies, but the surviving spouse’s estate can also utilize the unused estate tax exclusion amount of the first spouse to die. I’d say this is the most often-overlooked mistake being made in 2023 because while there is no requirement often-times that a federal estate tax return be filed after the first spouse dies, the filing of the return with the proper portability election can save significant tax upon the death of the surviving spouse.
Conclusion:
So there you have it. Five mistakes often made when people create, maintain, and pass away with a RLT-based plan. If you’d like to have a discussion about creating your own customized estate plan with one of our attorneys at AEPL, click the link below. We’ll even absorb the expense of that initial zoom meeting so that you will eventually have an opportunity to make an informed decision about how to create your own estate plan.