Speakers: Maritess Bott & Unidentified Off-camera Speaker
[Music]Off-camera Speaker: All right, Maritess, today I would love an answer to the question: how to avoid common trust errors.
Maritess: Yes, that’s a great topic. Hi there, my name is Maritess Bott. I am an attorney, and I practice in the fields of estate planning, probate, and trust administration. Thank you for watching or listening to our podcast.
We’re going to talk about common trust errors. I know a lot of people already have trusts, and that’s great. That’s always a good first step. But there are other things you might not even think about. It’s not only creating the trust, but also doing things after the trust is created, as well as maintaining the trust. It’s similar to your car — we have to have a few tune-ups here and there. You can’t just let it go and get stale.
There are five main mistakes. Number one is creating the trust but then forgetting to put funds in the trust account, or actually funding the trust. That is really the biggest mistake. You can create the best document ever, sign it, and walk away thinking you’re done — and most people think that. But the second step in creating a trust is just as important. When you create a trust, you must actually fund it.
What does that mean? It means that you want to have your assets connected to your trust somehow, whether it’s retitled into the trust or the trust is the beneficiary of those accounts. For instance, with your house or any real estate, we want those to be retitled into the trust. That means preparing a deed that says “John Doe to John Doe Trust,” and then filing it with the county where the residence is located. That typically must be done through an attorney. If you have multiple real estate properties in other states, then certainly work with your lawyer to get those assets into the trust. Otherwise, you’ll be opening probate in all those states.
As you may recall, when you created a trust, it was generally to avoid probate. So all of these errors are to avoid probate — to correct these errors and make sure your assets are properly titled.
The other types of accounts or assets you might own are bank accounts. We all have checking and savings accounts. We always recommend that you put the trust as the beneficiary of those accounts. At a bank, this is typically called “transfer on death” or “payable on death.” You would put the John Doe Trust as beneficiary after both husband and wife have died if it’s a joint account, or upon your death if it’s a single account.
If you have life insurance or retirement accounts — 403(b)s, IRAs, 401(k)s, annuities — those accounts have beneficiary designations. I recommend that if you’re married, your spouse should be the first beneficiary, and then you put the trust as the second beneficiary. I know it’s very common for people to think, “I’ll just put my kids as beneficiaries,” and it sounds simple. However, once you do that, you can no longer control how that money goes to them.
Not only could they misuse the money in the future, but they could end up in a situation where the money is at risk. For example, if they develop a drug or alcohol addiction, that money could be used for that purpose. Or they could receive their inheritance, get into a car accident, and then get sued — and now that money is available for that lawsuit. So it’s really important to create a trust and actually fund the trust. That’s mistake number one: forgetting to fund the trust.
Number two is naming the wrong person as your trustee. This happens often. Parents typically say, “I’ll just put my oldest child there because it’s in birth order.” But what if your oldest child is not really the appropriate person? What if your oldest son or daughter is not financially savvy, or might take that role and use it as a power trip? It may simply be the wrong person.
I’ve had families fight for years over assets because the trustee was difficult to deal with. Some have even done egregious things, like stealing money from the trust and taking it away from the rest of the family. The person you choose as trustee can also use the money or assets if you are disabled. If you have a stroke or develop Alzheimer’s, this person you’ve chosen will have access to that money because you’re no longer able to make decisions. They can pay your bills, but they could also start writing checks to themselves or anyone else.
The person you choose as trustee is a key position. If you pick the wrong person, it could be a huge mistake for the whole family.
Number three is disliking the spouse of your beneficiary. That might sound strange, but it’s a real issue. When you create a trust and have family members — whether children, nieces, or nephews — you might think, “I’m giving that money to them.” But once you give it to them outright, usually in documents that say, “Give them their money directly,” there are no strings attached. If you’re not fond of the spouse they’ve chosen, then you should make sure the trust has provisions that say the money is only for your child or your relative — not their spouse.
You can absolutely do that. It’s your money, and you have the right to direct how it’s handled. The money can be held in trust and used for your child or your niece or nephew. Then, when that person passes away, it could go down to the next generation — your grandchildren or grandnieces and nephews. It doesn’t have to go to the spouse.
Another scenario could be this: you give your child money, they put it into a joint account with their spouse — maybe $500,000 — and a year later, they file for divorce. You weren’t thinking you were funding your child’s ex’s lifestyle, but that’s exactly what can happen if you don’t put the right instructions in your trust.
If you don’t like the spouse of your beneficiary, make sure the money never goes to him or her. There are ways to do this legally, with proper instructions in your trust.
Number four is choosing the wrong type of trust account. When creating a trust, you must choose accounts suited to the beneficiary’s needs — either for long-term growth or for more immediate use.
For example, planning for a special needs child is very different from planning for a 70-year-old adult who needs the money immediately. The way you invest might be different — long-term growth versus keeping more in cash for short-term needs.
The mistake here is not knowing your beneficiary — not understanding who is receiving the money. This can have tax consequences and affect access to funds. Choosing the wrong type of trust account can create major problems.
Number five — last but not least — is thinking that all you need is a trust and nothing more. That’s a big myth. People often say, “I already created my trust; I’m done.”
I’m a big fan of protecting your whole estate and your family, not only in the event of death but also in the event of disability. The other two documents that are just as important as a trust are Powers of Attorney — one for health care decisions and one for financial decisions.
You definitely want to make sure that if you’re alive but unable to act — for example, if you have dementia or a stroke — someone can still pay your bills and talk to your doctors about your care. If you don’t choose that person, if there’s no one authorized, then it goes to court again. It’s called guardianship. Guardianship is very expensive, time-consuming, and something you want to avoid.
So not only should you have a trust, but also Powers of Attorney for health care and property.
The other main document as part of your estate plan is a will. The last will and testament is still important when you have a trust. It’s called a “pour-over will” — p-o-u-r. It means that anything you didn’t put into your trust will get poured over to your trust. This type of will is short and simple. It doesn’t have distribution provisions; it just says, “Give everything to my trust.” It works hand-in-hand with your trust.
If you have a living trust and no will, there’s an issue. You should always have a will, a trust, and Powers of Attorney for property and health care.
These are all important things to consider. To recap:
Mistake number one — forgetting to fund the trust.
Mistake number two — naming the wrong person as trustee.
Mistake number three — not protecting against a beneficiary’s spouse.
Mistake number four — choosing the wrong type of trust account.
Mistake number five — thinking your trust is the only document you need.
I’m Maritess Bott. You can call us or check out our website for more information. Feel free to reach out for a consultation with a $500 fee. We can review your current situation and objectives and see what we can do to improve them.
Have a great day, and thank you for watching.
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