1. Make certain that the document is a Living Trust, not a Testamentary Trust.
A Testamentary Trust is one created by will and does not avoid probate. Of the two, only the Living Trust avoids probate.
2. Be sure you know whether the trust is Revocable or Irrevocable.
One is changeable, one is not. Neither one is right or wrong, the question is “which is appropriate for your situation?” Most people start with a Revocable Trust and then if the size of the estate, or the type of assets justify, an Irrevocable Trust might be appropriate, in addition to the Revocable Trust.
3. Be certain that you have the right type of trust: Simple, AB, ABC, Disclaimer, etc.
The best trust for you depends on the type of assets that you have, the size of the estate and the ultimate beneficiary of the trust. It is common for the discounted estate plan to offer the “one size fits all” AB Trust. If the size of your estate doesn’t justify this type of trust, you will end up paying unnecessary settlement fees to solve an estate tax problem you don’t have, while triggering income tax problems that would not have existed but for the Trust. If you’re not sure whether the AB will be necessary, use a Disclaimer Trust and let the survivor decide.
4. Make sure that your trust document or some companion document indicates that the assets are to be treated as though they are community property.
Assets treated as community property will receive an adjustment in the basis when one spouse passes away, alleviating any capital gains on appreciation up to the death of the first spouse. And don’t make the mistake of assuming that all assets in the state of California are community property. They are not and the I.R.S. treats non-community property assets different than separate property assets for adjustment and basis purposes.
5. Be sure that your trust contains the assets it should – not all assets should be owned by the trust!
Traditional assets that trigger probate, such as: real property, stocks, bonds, securities and bank accounts typically should be placed in the name of the trust. Qualified Retirement Accounts where income taxes are being deferred should not be placed in the trust. Make sure you have written instruction clarifying the difference for your particular estate plan.
6. Is your life insurance payable to the trust?
Remember, life insurance proceeds are estate tax includable. This means that careful planning needs to be done with regard to the life insurance, depending on the size of the estate and the face amount of the life insurance policy. In most cases, life insurance should not be payable to a spouse, but rather payable to a trust and/or owned by an Irrevocable Trust, depending on the size of the estate.
7. Be certain that the removal of Trustee process is understood.
When one Trustee cannot act, the other one typically takes over. This is usually a spouse, a son or daughter, or many times, an independent fiduciary, such as a bank or commercial Trust Company. The process for removing a Trustee is one of three things. One – death; two – resignation; and three – incompetence. It is in the incompetence area that we run into problems. How is it defined? If the document is left without a standard of incompetence, the traditional approach is to have a Conservatorship appointed for the Trustee. The problem with this is a Conservatorship proceeding is one of the elements we are trying to avoid in the creation of a trust. A more appropriate method might be to have some standard less than that, such as the Trustee is no longer able to sign their name or doesn’t know what they are signing. This does not necessarily mean the person is incompetent, it simply means that they cannot sign their name. The next question is who is the individual who decides that the Trustee is no longer capable of signing and knowing what they’re signing. One of the options is having the alternate Trustee make that decision. That might be appropriate depending on who the alternate Trustee is. However, it may be a conflict of interest. Another alternative might be having family members all vote when the Trustee is no longer able to act. Make sure you have a good relationship with your family members. Another alternative would be to have two independent licensed physicians make the decision. Not the decision that you should be placed under Conservatorship, but rather you are unable to sign your name and/or you don’t know what you’re signing.
8. Be careful that the Trustee has the ability, if necessary, to qualify your estate for State assistance.
Trying to qualify for State assistance is difficult if you don’t have the right assets. The State typically ignores some assets and others have a maximum amount of which you cannot exceed. The goal, if we’re trying to qualify for assistance from the State, is to own those assets that are excluded, either by retention or by acquisition, and try to reduce the value of those assets that are not excluded. Unfortunately, if the Trustee of a trust is required by its terms to liquidate assets within the trust in order to facilitate payment of bills (such as long-term nursing care), it will work in direct opposition of what we want to actually do. In other words, if the Trustee is required to liquidate the estate, this will create cash. Cash is not ignored in the qualification process. Hence the trustee’s instruction may cause depletion of the estate due to the excess cash position. The solution is to include a catastrophic illness provision in the trust, allowing the trustee to acquire those assets which are ignored for qualification. (There is a maximum amount of liquid assets you can have and qualify for assistance) and the goal is to require assets which are excluded, the Trustee’s instructions may mandate that the estate be liquidated and lost.
9. Make sure that the purpose of the Revocable Living Trust is not asset protection.
Because the trust is revocable and you have access to all of your assets, your creditors likewise can access the assets also. If the goal is to put the assets out of the reach of creditors, then other methods of protection should be considered, such as a Qualified Personal Residence Trust (this will also reduce the estate tax consequence at the death of the Trustor), a Family Limited Partnership (this is a very popular method of not only protecting the estate from law suits, but reducing the estate tax consequences while maintaining control for the creator or General Partner), and/or some type of a corporation (“S” Corporation, Limited Liability Corporation, or a “C” Corporation).
10. Be certain that you have not only a power of attorney, but the correct power of attorney.
There are basically two types of powers of attorney. One is for health care and one is for financial care. The Financial Power of Attorney can be general or durable and either one of those can either be current or springing. Basically the durable is preferable because is endures beyond the incompetence of the principal, (the one who gave the power to the agent). The springing power of attorney becomes effective when the principal becomes incompetent. The immediate power of attorney is effective immediately upon signature of the principal. Which is appropriate for you depends on your circumstances. However, because of its tremendous potential impact, the type of power of attorney and choice of agents should be closely monitored.
11. Make sure that your Health Care Powers of Attorney was not signed prior to 1992.
The second kind of Power of Attorney is the Health Care Power of Attorney. This is an important part of your estate planning documents, but be sure the one you have is not dated before 1992. Prior to that date all powers of attorney had an expiration of seven years or less. Obviously, they have all expired now and need to be reissued. The new Health Care Powers of Attorney do not need to have an expiration provision in them. A common companion to the Health Care Power of Attorney is a document called a Directive to Physician, commonly called a Living Will. These documents, if signed prior to 1992, also had an expiration clause of five years in them. Again, the new version does not have an expiration clause. Consequently, if updated and properly signed, will last your lifetime.
12. Make sure that the individuals that you have appointed to serve in various capacities in your documents are still willing, able, and your choice.
The person that you choose to be in charge in a trust is called a Trustee. Often times, people will choose Trustees who made sense at the time, but some years later, those Trustees may have moved away, your relationship with them may have deteriorated and/or it might be more appropriate simply to choose somebody else as the Trustee. When you choose the new Trustee, make certain that the companion Will to your document, wherein you name Executors, is consistent with the Trustees. If you have young children, Guardians for these minors should also be nominated in the Will and these need to be reviewed possibly more often than other representatives as these are the people who will be raising your children. As we all know, children’s needs change and so does the willingness of people to serve as Guardians. In addition, the agents under your Health Care Power of Attorney and Financial Power of Attorney should be reviewed and analyzed. Make sure that the person that is making life and death decisions at the hospital is on good terms with you!
13. Analyze the distribution schedule to see if it’s still appropriate with your circumstances.
Sometimes it makes sense to distribute the assets outright free of further trust and sometimes it doesn’t. If you have younger children, it wouldn’t be appropriate to deliver the assets to these minors or to young inexperienced children. Assets can be held in a trust for a number of years until the desired age is attained with discretionary distribution for emergency needs such as health or education. Sometimes the purpose for placing the assets in the trust for the benefit of your children is to avoid their creditors. This can be done so that the children have access to the funds but nobody else does, (i.e. lawsuits, divorce situations, creditors, I.R.S., etc.). Then again the appropriate provisions were placed in the trust to hold the assets until the child or children got older and they are older now. This section should be monitored very closely.
14. Protect your estate by obtaining qualified legal advice!
The last and most serious mistake (This is a bonus, I only promised thirteen) is assuming that you can readily understand all of this without the assistance of a qualified experienced attorney. Not a paralegal or a financial planner. These are wonderful professionals, but they cannot give legal advice. Whether you already have a trust that needs to be corrected or whether you’re just putting your plan together, it doesn’t have to be expensive. And that includes the expense of a law firm that for over twenty years has done nothing but estate planning.