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. For many people, that means incorporating at least one trust into their estate plan. The best way to ensure that you do not make any mistakes with a trust you create is to work closely with an experienced trust attorney. In addition, the Carmel trust attorneys at Frank & Kraft 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 Settlor (also referred to as a Maker, Trustor, or Grantor), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. Most people enter into trust agreements regularly without realizing it. 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 Settlor and is usually triggered by a provision in the Settlor’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 Settlor. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason once the trust is active.
Common Mistakes People Make When Creating a Trust
- Creating 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 because assets held in any other type of trust remain accessible to creditors and other threats to those assets.
- 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 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.
- Incorporating vague or conflicting terms. If you are not the Trustee of 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 a Carmel Trust Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about creating a trust, contact an experienced Carmel trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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