Revocable living trusts are a popular and effective tool in estate planning. They offer flexibility, privacy, and control over your assets. However, like any legal instrument, revocable living trusts can be subject to pitfalls that can undermine their effectiveness and lead to unintended consequences. In this post from Blackford & Flohr, we will take a look at some of the most common pitfalls associated with revocable living trusts and how to avoid them.
Understanding Revocable Living Trusts
A revocable living trust is a legal entity created to hold your assets during your lifetime and to distribute them according to your wishes after your death. As the name suggests, a revocable living trust can be modified or revoked by you at any time during your lifetime. This flexibility makes it an attractive option for many individuals seeking to manage their estate planning needs.
Common Pitfalls and How to Avoid Them
Failure to Fund the Trust
One of the most common mistakes people make with revocable living trusts is failing to properly fund the trust. Funding the trust involves transferring ownership of your assets from your name into the name of the trust. You can avoid this problem by prioritizing the following:
- Make a comprehensive list of all your assets, including real estate, bank accounts, investment accounts, and personal property.
- Work with your attorney to ensure that the titles and ownership documents for each asset are correctly transferred to the trust.
- Periodically review your trust to ensure all new assets are added.
Improperly Drafted Trust Documents
Poorly drafted trust documents can lead to confusion, legal challenges, and unintended distribution of assets. Ensure that your trust is drafted by an attorney who specializes in estate planning and has experience with revocable living trusts. Use clear and precise language in your trust documents to minimize ambiguity and potential disputes.
Overlooking Incapacity Planning
A revocable living trust should include provisions for managing your assets in the event of your incapacity. Failing to include these provisions can leave your estate vulnerable. Make sure your trust includes clauses that specify how your assets should be managed if you become incapacitated. Designate a successor trustee who can take over the management of your trust if you are unable to do so.
Not Updating the Trust
Another common pitfall is neglecting to update the trust to reflect changes in your life circumstances. Changes include:
- Marriage
- Divorce
- Birth of a child
- Significant changes in your financial situation
- Death of a beneficiary
- Changes in relationships with trustees or beneficiaries
- Purchase or sale of significant assets
- Changes in state or federal laws
Schedule regular reviews of your trust with your attorney, ideally every three to five years or after any major life event. Be sure to keep your attorney informed about any significant changes in your life that may necessitate updates to your trust.
Failing to Consider Tax Implications
Tax laws can have a significant impact on your estate plan. Failing to consider the tax implications of your revocable living trust can lead to unexpected liabilities for your beneficiaries. You will want to work with a tax professional to understand the tax implications of your trust and to develop strategies to minimize tax liabilities. Keep informed about changes in tax laws that could affect your trust and update your estate plan accordingly.
Not Communicating with Beneficiaries
Lack of communication with your beneficiaries can lead to misunderstandings and conflicts after your death. Examples include:
- Unclear distribution of assets
- Unexpected designations
- Disputes over trustee decisions
- Legal challenges
- Emotional strain
Communicate your estate planning decisions with your beneficiaries to ensure they understand your wishes. Leave clear instructions for your trustee and beneficiaries to follow after your death.
Choosing the Wrong Trustee
Selecting the wrong trustee can lead to mismanagement of your trust assets and potential legal issues. Choose a trustee who is trustworthy, financially responsible, and capable of managing your trust according to your wishes. If you do not have a suitable individual to serve as trustee, consider appointing a professional trustee or trust company.
In Conclusion
Revocable living trusts are powerful tools for estate planning, but they must be carefully managed to avoid common pitfalls. By funding the trust properly, updating it regularly, drafting clear and precise documents, planning for incapacity, considering tax implications, communicating with beneficiaries, and choosing the right trustee, you can ensure that your revocable living trust effectively meets your estate planning goals.
Contact Blackford & Flohr for Maryland Estate Planning Attorney Services
If you need help managing a revocable living trust, the experienced Maryland estate attorneys at Blackford & Flohr are here to help. We specialize in Maryland estate planning attorney services and can provide you with the guidance and support you need to create a strong estate plan. Contact us today to schedule a consultation and learn more about how we can help.
