Avoid These 9 Common Trust Pitfalls
Trusts are a great tool in estate planning, offering flexibility, control, and streamlined administration. However, like everything, there are potential pitfalls if not used properly.
9 Common Pitfalls When Creating a Trust and How to Avoid Them:
Failing to fund the trust: Creating your trust is just the first step. Once your trust is created, the assets that you want to be placed into your trust, such as your house and accounts, need to be transferred. For your house, this is usually done with a quit claim deed. For your accounts, you update the account ownership to your trust directly with the financial institution. If you skip this step, the trust won't actually own anything.
Failing to establish sub trusts upon triggering events: Many trusts have sub trusts built in which are usually triggered upon the passing of the grantor. For example, your trust might include a credit shelter trust or a children's trust that needs to be created when you pass away. This is easy to do, but it is not automatic. The trustee needs to take steps to actually create these sub trusts and place whichever assets are directed into the sub-trust.
Failing to title future assets into the trust: At the time of creation, the appropriate assets are placed into the trust. However, if assets are acquired later - for example, if you buy a new home – you need to ensure they are properly titled and assigned in the trust (if that is the intent).
Failing to create a pour-over-will: In the event someone fails to properly title their assets (1 and 3 above), having a Will that directs everything you own to be placed into your trust, also known as a pour-over-will, gives a backup option to ensure your assets make it over to your trust. If the assets are not in your trust, and there is not a Will in place, your estate is considered "intestate" and the default statutes control your probate assets.
Failing to plan for contingencies: People often plan for the situation as it is right at that moment, not thinking about the realities that could occur before they pass. This means circumstances change, beneficiaries or trustees could pass away, or there may be traumas, such as a car accident, that cause disability. Future births, divorces, and marriages happen. Consider the possibilities of how things may change and make sure to have alternatives "just in case".
Choosing the wrong trustee: Choosing your trustee is one of the most important decisions. Your trustee has control of the trust assets, directs how they are invested and distributed, controls how fast or slow the trust is administered, and has the power to make the trust administration seamless or litigious. Some traits to look for in a trustee are someone who is responsible, reasonable, understands finances and investing, understands complex legal concepts, is fair and easy to get along with, and is available to do the job. If you don't have a friend or family member with these traits, the best gift to your beneficiaries is to name a professional who will get the job done.
Overly complex trusts: Not all trusts are created equally and not all situations require complicated trust planning. Your trust should be written in a way that your goals are met, and the administration not convoluted.
Lack of communication: Communication is one of the keys to avoiding complexities and litigation. When a trust is set up, it is best to communicate with whomever you have in mind as a trustee to confirm that they are up for the job and understand what it entails. In Washington "silent trusts" are not allowed - the trustee must have open communication with the beneficiary about what the assets are and regular accountings so the beneficiary can ensure they are being properly protected.
Tax consequences: Taxes are part of life. Trusts can be a great tool to structure around certain types of taxes, but when used incorrectly, trusts can create more taxes than there would have been in the first place. Take income taxes for example, the 2025 income tax bracket for a trust reaches the 37% bracket just after $15,650 whereas a single individual doesn't reach the 37% bracket until $626,351. Trust terms need to be written with tax consequences in mind and trustees need to pay attention to how the trust is being administered to ensure there are no surprise tax impacts.
If you have a trust, or are considering creating one, keep these potential issues in mind to ensure your plan is carried out in the way you have in mind.
If you want to learn more, I recommend exploring more about trusts HERE. Or attending one of my seminars. Look for upcoming seminar dates HERE.
Better yet, Schedule Your Consultation, and take the first step toward creating a complete estate plan that protects what matters most to you and your loved ones.
