For 40 years I have reviewed trusts, and for 40 years I have seen the same mistakes occur repeatedly. Mistakes that are usually ugly, often costly, and sometimes fatal – at least to an estate plan.
Heed this, then, and take fair warning.
1. Failing to fund the trust.
Funding means transferring assets into the trustee’s name. This puts the asset under the management of the trustee and makes the asset subject to the trust’s terms. A lot of people pay for a trust to be created, and then do not follow through with funding the trust. A trust without assets is a worthless piece of paper. A trustee for a trust without assets is unemployed.
2. Putting your homestead into the trust.
Sometimes this works, but more often it does not. In Texas, a homestead designation carries all sorts of benefits, such as creditor protection, tax exemptions, and bankruptcy protection. You will lose these when you put your homestead into a trust unless it is a “qualifying trust.” The requirements for a qualifying trust are set out in Texas Property Code Section 41.0021. For a particularly scary case about a Texas couple who lost their homestead in a bankruptcy because they had put it in a trust, read the Cyr opinion out of the Western District of Texas.
Another potential problem: if your homestead has a mortgage, then transferring it into a trust may cause a default. A federal law, the Garn-St Germain Act of 1982, provides some exceptions but, again, the trust must contain the right language.
Yet another problem: a mortgage company may refuse to refinance an existing mortgage or extend new financing on a homestead that is in a trust.
3. Funding the trust with a vacation home.
This can be a nightmare for the beneficiaries of your trust. Most people don’t leave enough money in the trust to maintain the home in perpetuity. Your children, and their spouses, squabble over holiday usage. The grandchildren don’t want to go there. The vacation home ends up being an expensive albatross.
If you truly want to keep the property in the family, then consider a family limited partnership or an LLC. Or, better yet, talk to your kids about whether they want to keep it. Their answers might surprise you.
4. Not reading your trust document.
I sympathize, truly. Most trusts are long, boring, and contain provisions that make absolutely no sense to anyone but the IRS. But, by gosh, if you are going to rely on a trust for your financial future and legacy, then you need to do better than to relegate it, complete with its faux leather binder, to the top of a closet to gather dust.
Try this exercise, instead. Look at the assets you expect to fund into the trust. Pick one asset, and see if you can track how it will be processed through the trust as you age, become incapacitated, and then die. Who will be the trustee managing it? Can the asset be invested or sold? Who will be the beneficiaries? What will happen to the asset if your spouse dies first – must it be divided between two trusts or will it stay in just one?
5. Not reviewing the trust annually.
Everything can, and will change: people, assets, goals, laws, even you. Your trust may need to change, too.
Mistakes don’t have to happen to you. If you have a trust, then own it.
Trust Hammerle Finley With Your Trust
Attorney Virginia Hammerle has practiced litigation and estate planning for 40 years and has been board certified in Civil Trial Law for 25 years. Her practice includes:
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