The Biggest Mistakes Made with Trusts

Trusts can effectively manage and distribute your assets without the need for probate but must be set up and maintained correctly. The Dallas Morning News’ recent article entitled “Owning your trust: Avoid these five common trust mistakes” explains these big mistakes frequently made with trusts. This article will discuss these mistakes and offer guidance on preventing them from undermining your estate plan.

Failing to fund the trust:

One of the most significant errors people make with trusts is not funding them, which involves transferring assets into the trust and managing them with the trustee. A trust without assets is essentially a worthless piece of paper. To ensure your trust functions as intended, work with your trustee to transfer and manage your assets according to the trust's terms.

Placing your homestead into the trust:

Transferring your primary residence into a trust can result in the loss of specific benefits, such as creditor protection, tax exemptions, and bankruptcy protection. In some states, such as Texas, these benefits are only retained if the trust is a "qualifying trust." Transferring a homestead with a mortgage into a trust may trigger a default, and mortgage companies may be reluctant to refinance or extend new financing in a trust. Consult with an estate planning attorney to determine the best way to protect your homestead within your estate plan.

Funding the trust with a vacation home:

Including a vacation home in your trust can lead to complications for your beneficiaries, mainly if there aren't sufficient funds to maintain the property. Disputes can arise among family members over usage, making the vacation home a financial burden. If you want to keep the property in the family, consider alternatives such as a family-limited partnership or an LLC. However, consult with your children beforehand to ensure they are interested in retaining the property.

Failing to understand the trust document:

While trust documents can be lengthy and complex, it is essential to understand the contents and implications of your trust. This is particularly important if you rely on trust for your financial future and legacy. Work closely with your estate planning attorney to ensure you have a clear understanding of the trust's provisions and how they will impact your assets.

Failing to review the trust annually:

Circumstances can change significantly within a year, such as the acquisition or loss of assets, changes in financial conditions, and life events like births, deaths, divorces, or marriages. These changes may necessitate updates to your trust. Review your trust annually with your estate planning attorney to ensure it remains aligned with your intentions and circumstances.

By avoiding these common trust mistakes, you can ensure that your estate plan remains effective and serves its intended purpose. Work closely with an experienced Austin estate planning attorney to establish, fund, and maintain your trust and to review it regularly to accommodate any changes in your life or financial situation.

Reference: Dallas Morning News (March 12, 2023) “Owning your trust: Avoid these five common trust mistakes”