Episode 10: Avoid These Common Trust Mistakes

Estate Planning Lawyer Peter Klenk shares the most common mistakes people make when forming trusts as part of their estate plan.  

Transcript

 00:01
"Hello, let's talk about death and taxes. This is Peter Klenk, a trust and estate planning attorney who has been doing this for a long time. Today, we're going to talk about common trust mistakes. What are the most common mistakes that I see people making when they're using or forming trusts?

Now, a little bit of background. If you haven't listened to my other podcasts, there's a little basic about what is a trust. Let's just be on the same level here. You might know this already, but let's make sure. So, remember, a trust is an arrangement from old British law that we still use in the United States. We did our company with the British in the 1770s, but we kept the legal system and its base. You have the grantor, the person who grants the power to a trustee, the person you trust to hold the assets for a third party, the beneficiary, the person who benefits from the whole arrangement. So grantor, trust, and beneficiary, and you have a trust.

And remember, in our legal system, forming a trust is essentially like forming or creating a person. The trust can own assets, it can hire people, it can pay taxes, it can do mostly what a human being can do, but it is a trust. So it needs that human personification. That's the trustee. The trustee doesn't own what's in the trust, remember, they just manage it and take care of it. And the beneficiary doesn't own what's in the trust either. The trust owns the assets for the beneficiary, and the trustee just manages.

So, those are the basics. There's a lot more to it than that, folks, but those are the basics. What do I see as the most common mistakes that people make? Well, they'll form a trust, either revocable or irrevocable (we'll talk a little bit more about that later), but they won't put anything in it. There's this impression that people have that once the trust is formed, it owns stuff. But the reality is, it doesn't. If you sign it, you grant the power to a trustee to hold assets for the beneficiary. That's nice, but it's empty until there's something in it; it's really kind of meaningless. It's just sitting there.

So, if you transfer in some cash, the trustee can take a check to a bank or financial institution, open up an account (it's really rather simple to do), and deposit the money you gave to the trust. And now the trust is funded; the trustee can actually manage and take care of things without help from the beneficiary. If you transfer land, then it's a deed. You file the deed, say, "Well, I'm moving this deed from my name into the trust name," and as soon as it's filed, there you go; the trust now owns something.

A common mistake with revocable trust is that sometimes these programs people have will kick out this list at the end, and it'll say, "Oh, these are the trust assets." And you know, you're the client, you don't know, you haven't done this. So what do you do? You look at that list, you think, "Well, all those things are now in the trust?" Well, they're not; they're not in the trust. They're on a list. What does that do? I can make a list and say the Brooklyn Bridge is in the trust. But I'm telling you, the Brooklyn Bridge is not owned by the trust; you've got to make the transfer.

So, I think those lists often confuse people and should not be included. You have to transfer the account with the real estate, transfer the stocks, and move the assets into the trust. Then it's there. So, I'm going to talk a little bit more about revocable trusts. This is a very common mistake. People form revocable trusts, especially in New York, California, and Florida, to avoid probate, and then they think that by signing it, it's done. But the reality is that you have to move your assets, and there are a series of steps you have to take to fund it so that when you die someday, your assets don't go through probate because they're owned by the trust.

Okay. Let's move on to another mistake, picking a terrible trustee. Welcome to my litigation department. We have three attorneys at our firm that do nothing but estate litigation, and a lot of it is about people picking the wrong trustee. You might pick your kid because he's your kid or pick your oldest because they're the oldest, but you don't stop to think, "maybe I should pick somebody else." A trustee is called a trustee because you trust them to take care of things. Being a trustee can be a real pain depending on the situation, especially if you have a special needs person as a beneficiary, or you have a business or something that requires a lot of management. Or when you die, you know that there will be people clamoring for their money, and they need to be managed. You need to have somebody who can handle the situations that are going to arise. If you pick the wrong person, they might be the nicest person in the world, but they can get stressed out by pressure. Then they put their head in the sand, so to speak, and then everybody gets irritated. Or you pick two kids, which is a terrible situation if your kids don't get along. I can't tell you how many times I've asked clients if their kids get along and they say no. Then I have to talk to them about not naming the kids as co-trustees because they're just going to fight. They can't help themselves. It's the nature of sibling rivalry. So, you have to pick the right person, the person who can do the job. Brainstorming about who's the right person for the job is something you do with your trusted estate attorney. They can tell you, based on the assets that are there, the length of the trust, its purpose, who might be a really good fit.

Another mistake is not understanding or updating your trust. Sorry, not updating and not keeping it up to date and reacting to what is happening in the world.

Now, this is easily done with a revocable trust. A revocable trust can be modified and edited whenever necessary, and it replaces your will. I have seen people with revocable trusts that they set up 20 to 25 years ago when their kids were little. They somehow think it's magically evolving as the kids get older, but it's not. Like a will, you need to adjust for changes. That brother you picked to be in charge may not be the best choice anymore. Maybe you picked someone to be in charge when you had one kid, and now you have three, and it's a little harder to take care of. There may be more complications, and the kids may not get along so well. It depends on the assets. With a trust, it can be modified for changes in the law. For example, Pennsylvania and New Jersey got rid of the rule against perpetuity some time ago, so trusts can go on forever now. If your trust is old or was done under the old rules, it may say that when your kids die, it goes away, but that's not necessarily the case. You really want to set things up so your trust can go as long as possible. If the trustee is empty, and it's done, that's fine. But as long as the trust can continue, why not let it be sheltered from divorce, lawsuits, and problems that might come your way? That's another thing: keeping your trust up to date. If you have an irrevocable trust, it used to be very difficult to update when I started my practice. Now, it's become much easier in the right circumstances. You don't have to go to court; you just do it with the parties involved. Otherwise, you can go to court, and the courts are much more open and flexible about making changes to your revocable trust than they used to be. So think about your trust. Don't imagine it's gone forever. And even if it's not terrible, like you picked a trustee who's now dead or in jail

08:47
But it's nothing, nothing wrong with checking it over your trust and estates attorney and making sure that it is up to date as possible, why not do a little review and make sure that there's not something you can improve on? The last thing is to understand that when you set things up, it's understanding the needs of your beneficiary. Remember, a trust isn't something you set up and nothing in the world changes, and especially a special needs trust.

You might set up a trust and say, "Well, I feel like this is enough money to take care of my special needs son until he dies." But you know, the program maybe your son has changed, maybe your assets have changed? What will your son need? And after time, maybe you realize, well, you thought he was going to stay in your house after you die, which you realize that won't happen, right? For whatever reason.

So now, maybe you need to have enough money in the trust to take care of an apartment building or just the expenses of the care have increased. Maybe there's a physical disability that's gotten worse and requires more care.

So you got to think about the purpose of your trust. Is it still able to fulfill its purpose with the amount of money or whatever you're funding the trust during your life or after death?

Can it still fulfill its purpose because you went to all the work to take care of the trust and form it? You just want to make sure that it continues and provides the care that you wanted it for, right?

So that's it. Those are the top, there are always little things. But what it really comes down to is with a trust, you have to look at it as an ongoing venture.
A trust isn't something you just do and forget about it. It might still be fine, but there's no reason not to dust it off every once in a while and take a look and say, "Hey, you know that there's a way to do this." So, hey guys, that was just a quick conversation about typical errors that are made on trusts that I see. If you have questions about trusts, revocable, irrevocable under the will inter vivos, while you're alive, I'm happy to talk to you about it if it's in Pennsylvania, New Jersey. And if you're outside those states, well, there are fine trust and states attorneys out there who would be happy to talk to you about how a trust would best serve your exact situation. All right. Well, hey, it's been great talking about death and taxes. Peter Klenk here. Take care, and we'll talk again next time.