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Revocable Living Trust Funding and Estate Administration – Common Problems

February 14, 2014 Davis Law Group

If you set up a Revocable Living Trust (What is a Living Trust?) for estate planning purposes, you probably did so with the belief that it would make administration of your estate easy, simple and fast.  This may be true so long as your Trust was properly funded and up to date with current tax regulations.  The three biggest mistakes that I come across in Trust administration are: (1) the Trust is empty because it was not funded, (2) the Trust was improperly funded, or (3) the Trust is outdated and based upon old tax regulations.

Before we get into further detail regarding the three common problems, it is important to understand what it means to fund a Trust.  This is a common question that confuses many people.  Think of a Trust as a suitcase.  The goal is to place your assets inside the suitcase so that upon your death the successor Trustee (i.e. the person you placed in charge of handling your estate) can open up the suitcase, follow your instructions and distribute your assets accordingly.  The process of placing your assets in the suitcase is commonly known as funding.  However, an empty suitcase is useless and placing the wrong assets inside the suitcase will likewise cause problems.

Empty Trust

An Empty Trust is a common problem that is very preventable.  Most of your assets should be assigned to your Trust or re-titled in the name of your Trust.  For example, your investment account will no longer be in your individual name.  It will be re-titled to you as Trustee of your Revocable Living Trust.  Let’s take a look at John and Sally Smith who are married and set up two separate Revocable Living Trusts (if you are wondering why we did not set up one single Joint Trust, then check out this blog post: “Joint Revocable Living Trusts – Some Tax Dangers”).  John has an investment account that he needs to transfer to his Revocable Living Trust.  John will obtain a Change of Ownership form and re-title ownership of the account as follows: John Smith & Sally Smith, Trustees of the John Smith Revocable Living Trust, dated 02/14/2014.  John’s investment account is officially in the Trust suitcase.  Viola!  At Davis Law Group, we help each client step-by-step through this process.  We will look closely at every asset and assist you to ensure that your Trust suitcase is not empty.

Improper Funding

Improper funding of your Revocable Living Trust can cause a headache for your beneficiaries when they open up your Trust suitcase just to find that you placed the wrong assets inside.  The most common problems arise with retirement plans (IRA, 401k, etc.) and life insurance policies.  Your family dynamics and estate planning goals will dictate which assets to place inside of your Trust suitcase.  There is no simple answer or instruction that I can give you in this article.  Every individual and family is unique which requires unique solutions for them.  This is where it is essential that you enlist the advice of an experienced estate planning attorney who also understands the administration process following your death.  At Davis Law Group, we help each client determine which assets should be placed inside the Trust suitcase.

Outdated Trust

Your estate plan is a process and not just a one-time experience.  It should be monitored and updated consistently to reflect changes in the law and to your unique situation.  The most common problem I find during the Trust administration process involves outdated Trusts.  Specifically, Trusts that were written during a time when the unified credit against estate tax (your basic estate/gift tax exclusion amount) was at a much lower level than it stands currently.  For example, in 2001 the exclusion amount for an individual was $675,000.  Many people fall above this threshold when they include their house, life insurance policies, investment accounts and retirement plans.  If your Trust was written during this time, it is very likely that the attorney utilized several different strategies to maximize your estate and reduce potential estate tax.  However, the current exclusion for an individual is $5.35 million.  The strategies that your attorney used in 2001 may actually hurt you now and make your trust administration more difficult or problematic.

The above problems are all preventable by simply enlisting the help of an experienced estate planning attorney and keeping your estate plan up to date.  If you have any questions, please contact us and we will be happy to assist you through the process.