A trust is an estate planning document that is very similar to a will. In fact, some refer to trusts as “Will substitutes”. Like a will, a trust specifies who will administer your estate after you pass away. Under a will, this person is called the executor of your estate, while under a trust he or she is called the trustee.
A trust also dictates who will inherit or benefit from your estate—called your beneficiaries. What’s more, both a will and trust are signed and dated at the end.
So, a Will and a trust look very similar, as far as the document is concerned, but there is one important second step that must be taken with a trust that does not have to be taken with a will— once the trust is signed, you must “fund” the trust by transferring title or ownership of your assets into the name of the trust.
Once that happens, the trust will hold your assets and act as a standby device. Then when you pass away, the assets held in the trust can be distributed to the trust beneficiaries without having to go through probate—this ability to avoid probate is the number one distinction between a trust and will.
Common Problem That can Plague Your Trust
While creating a trust is not extremely complicated, some seemingly small oversights can have huge implications on the validity of your trust and whether or not it achieves the purpose for which it was created. Here are some of the most common mistakes to avoid when setting up a trust:
Failure to Fund
A trust is nothing but a pile of papers unless you fund the trust by transferring ownership of your assets from your name to the name of the trust. If you fail to put your property into the trust, you’ve rendered it void or useless.
Failing to Put Your Trust in Writing
Any trust that involves real property must be in writing. A trust arrangement created orally between family or friends will not hold up in court.
Failing to Use Language that Creates a Legally Binding Obligation
When attorneys write trust agreements, they typically use three types of language:
- Mandatory language that expresses a legally binding obligation that the trustee must fulfill;
- Discretionary language that expresses what the trustee is allowed to do at his or her discretion, but is not mandatory; and
- Precatory language that is used to provide information or to express wishes and desires, but does not oblige the trustee to act in either a mandatory or discretionary way.
Your trust cannot contain precatory language only.
Failure to Show Intent
To be held as valid, your trust document must show certainty of intention. This means that your trust must indicate a clear intention on your part to create a trust. An intention to create a moral obligation or gift is not sufficient to create a valid trust.
A written trust document is the best way to effect this. Furthermore, While there is no requirement that any specific language be used, the use of appropriate technical language in the trust document is key.
Failing to Name a Beneficiary
A trust is a contractual relationship established between a grantor (the person creating the trust) and a trustee (the person charged with managing the trust), for the benefit of at least one third party (the beneficiary) beneficiary or beneficiaries. Without at least one beneficiary, there can be no viable trust agreement.
Other Trust Problems to Avoid
There are many ways non-professionals do estate planning wrong that gives rise to probate litigation. Another common thing people fail to do is put a pour-over provision in their will. This clause transfers any remaining assets to your trust when you die. Without a pour-over clause in your will, any assets or property that have not been transferred to your trust at the time of your death will need to be probated and may not get disposed of correctly.
Another thing to avoid is having more than one successor trustee at a time. Firstly, having more than one trustee at a time means that documents will need to be signed by multiple individuals. Secondly, these individuals will all need to come to a consensus.
You should especially avoid having more than one of your children act as trustee at the same time. This is because siblings don’t always get along and family infighting, especially when they are co-trustees, is the fastest way for your estate to be squandered in court.
Finally, a failure to frequently review the terms of your trust can also lead to unwanted consequences. It is, therefore, important that you review what your trust says at least once per year. This to ensure that the terms of your trust are still aligned with your overall estate planning goals.
Consult with an Experienced Estate Planning Attorney
When drafting a trust, you should always enlist the assistance of a qualified estate planning attorney. An experienced estate planning attorney can help you avoid many of the problems that can render your trust ineffective or useless. For more information, contact us or sign up below for one of our events.