Revocable living trusts are a popular tool in estate planning, allowing individuals to manage their assets during their lifetime and specify their wishes after death. However, several common mistakes can undermine their effectiveness. Below, we present three practical examples of these pitfalls to help you avoid them in your own planning.
A revocable living trust must be funded for it to work properly. This means that assets such as real estate, bank accounts, and investments must be transferred into the trust. Failure to do this can lead to probate, negating the trust’s benefits.
Imagine a scenario where John, a retiree, creates a revocable living trust but only transfers his home into it. He forgets to add his bank accounts and investment accounts. Upon his passing, the remaining assets are subject to probate, resulting in delays and costs that could have been avoided.
Notes: It’s essential to regularly review and update the trust’s asset funding when acquiring new assets or changing ownership of existing ones. Consider working with an attorney to ensure all assets are correctly included in the trust.
When setting up a revocable living trust, it’s important to name contingent beneficiaries. These are individuals who will inherit the assets if the primary beneficiary is unable to do so. Not including contingent beneficiaries can lead to unintended outcomes.
For example, Sarah creates a trust naming her daughter, Emily, as the primary beneficiary. Unfortunately, Emily passes away before Sarah. Without a contingent beneficiary named, the assets will revert to Sarah’s estate and be distributed according to her will, which may not reflect her intended wishes.
Notes: Always consider possible scenarios when naming beneficiaries. It’s wise to include at least one contingent beneficiary to prevent any assets from being caught up in probate.
Life events such as marriage, divorce, or the birth of a child can significantly impact estate planning. Failing to update a revocable living trust following such changes can lead to complications and unintended distributions.
Take the case of Tom, who establishes a revocable living trust after his marriage. After several years, he divorces but neglects to update his trust. Upon his death, his ex-wife is still listed as the primary beneficiary, contrary to his intentions.
Notes: Regularly review and update your revocable living trust, especially after major life changes. This ensures that your current wishes are accurately reflected and reduces the risk of disputes after your passing.