Using Living Trust Forms - How to Avoid Common Mistakes
Many people assume they cannot afford to have their estate planning documents prepared by an attorney. As a result, they turn to online templates and preprinted forms in an attempt to make a will and related end of life instructions. Unfortunately, these cheap alternatives to using a lawyer frequently end up costing their heirs and estates thousands of dollars that could have been avoided by spending a few hundred dollars on a properly drafted estate plan. This article highlights some of the most common mistakes when using trust forms and how to avoid them.I recently reviewed a will, living trust, financial power of attorney, and health care directives for an individual named Lisa that purchased estate planning software sold by a well known financial advisor. Lisa used the software to create her estate planning documents at home and had them witnessed and notarized by her business associates. She had recently experienced a serious illness, was preparing for an important trip, and was in a rush to make a new will. After executing the documents, Lisa had complete confidence that her estate was now in order. However, upon reviewing them, I found numerous mistakes and errors in the forms she prepared that could lead to costly legal expenses and result in some of the documents being invalid. The following is a list of common mistakes when using trust forms:
1. Making a living trust when you do not need one. Some estate planning software programs and online estate planning kits include revocable living trust forms. Because many people think the wealthy pass their estates through private trusts, you may believe you are doing the right thing by filling out the living trust form included with the software. In fact, you may not need a living trust or you may need a different type of estate planning trust that is not included with the kit. In the example discussed above, Lisa executed the revocable living trust form simply because it was included in the estate planning program she purchased. She had no intention of funding the trust, but thought there was no downside to completing the trust forms anyway. By improperly preparing the living trust forms, Lisa created a host of problems with her estate plan.Before executing living trust forms, make sure you understand the reasons for making a trust, the purpose of the documents, and how your property will be distributed under the terms of the trust. Despite the claims made by those promoting estate planning software, only a licensed attorney familiar with your unique circumstances and the laws of the state where you live can properly determine whether you need a living trust.2. Failing to name a Successor Trustee. When making a living trust, it is common for the person making the trust, referred to as the Grantor or Settlor, to also serve as the Trustee of the trust. However, the grantor or settlor can only serve as trustee during his or her lifetime. After the grantor or settlor dies, a successor trustee must assume the duties of trust administration. A successor trustee is also required in the event the grantor or settlor becomes incapacitated and cannot manage his or her financial affairs.When a layperson makes their own living trust, they often do not understand the distinctions between an original or initial trustee and a successor trustee. In the example of the revocable living trust form executed by Lisa, she did not understand the need to name a successor trustee in her trust document. As a result, Lisa only named herself as the original trustee and failed to list the name of any individuals or trust companies to administer the trust after her passing. Unless this serious error in the trust form is corrected, it will not be possible to settle Lisa's estate in the manner she intended. Her heirs and beneficiaries would need to hire a lawyer and costly legal action would be required to administer her estate. Simple drafting errors like these are a primary cause of will and trust disputes.If you use a preprinted form or template to make an estate planning trust, make sure you clearly understand the different types of trustees named in a trust agreement and the role of each type of trustee. In addition, it is essential to properly name an initial or original trustee to serve during your lifetime, as well as a successor trustee to serve in the event of your incapacity or death. You may also wish to name an individual, attorney or trust company to serve as successor trustee if your first choice of successor trustee is unable or unwilling to serve as trustee.3. Failing to insert the correct state in the governing law section. One of the most common mistakes when using a trust form or estate planning software is failure to change the state whose laws should govern the trust from the state listed in the sample form to the state that is the correct choice of law for the grantor or settlor making the trust. Because a trust agreement is a fairly lengthy document, people often execute it without reading the entire document. As a result, they may not realize they have chosen the laws of a far off state to govern their living trust instead of the state where they live or another state that is appropriate to govern the trust. This is what happened to Lisa in the case described above. The trust form she used already had the State of California listed as the governing law. However, she lives in New Jersey. She failed to notice the error and executed her trust documents with the wrong state law provisions.State laws applicable to wills and trusts vary significantly from state to state. There are advantages to making a trust in one state versus another, depending on your reasons for making a trust, your financial situation, etc. Due to the complex nature of
trust law, every person that makes a living trust should speak with a lawyer first to determine which state should be listed in the governing law and choice of law provisions of the trust agreement.4. Failing to name contingent beneficiaries. A properly drafted trust typically includes provisions on how trust property should be distributed in the event the primary beneficiaries do not survive the grantor or settlor, or the beneficiaries are otherwise unable to accept the inheritance. Nevertheless, individuals that make their own trust documents often fail to include these important provisions. Lisa was not aware of the need to name contingent trust beneficiaries and now has to spend money to create new will and trust documents. Just as it is important to name successor trustees, it is also essential to state what should happen to trust property if the first plan of distribution cannot be fulfilled. If you use an attorney to prepare your estate planning trust, you can avoid these types of omissions that lead to problems in settling your estate.5. Failing to properly fund the trust. In order to have your assets pass to your beneficiaries according to the terms of the trust, you must first transfer title to property in the manner specified in the trust. Although you may be able to print and sign a trust agreement without an attorney, it is likely you will require legal assistance to change title to your home, business, financial accounts, and other assets. When dealing with significant assets such as real estate, always consult a lawyer before executing or recording trust transfer deeds or other types of deeds. Transferring title to property to fund a trust is only one of several steps required to establish and maintain an estate planning trust. For an overview of the steps involved, refer to our free living trust checklist.
6. Making the wrong type of will. If you do not have a valid living trust or other type of estate planning trust, the proper type of will that should be prepared is different from the type of will used when the testator has transferred property to a trust. See
types of wills. A serious mistake that is often made when someone uses will and trust forms is they make the wrong type of will. For example, if you use software to make a living trust and use the pour-over will form to make your will, but fail to properly draft or fund the living trust, the pour-over will may lead to expensive problems during estate administration. Because a pour-over will is drafted based on the assumption that estate property will pass through the trust, several problems can result if the trust form was not drafted correctly, title to estate property was not transferred to the trust correctly or similar types of errors were made. Having a complete last will and testament that fully covers all issues related to the testator's estate is the core element of an estate plan. If you are going to take the time to make an estate plan, have a licensed attorney prepare your will and review other documents you want to include, such as a living trust.Summary:This is only a brief list of some of the most common mistakes typically associated with using estate planning software or online programs to make or amend a living trust. While there are some high quality estate planning software programs, the problems may arise from a lack of knowledge or understanding by the user. In the same way that a consumer benefits from the advice of tax professionals and financial advisors, the benefits of retaining a lawyer to draft your trust documents cannot be overstated. Law libraries are filled with volumes of case law illustrating case after case where defects in wills and trusts resulted in litigation that consumed the bulk of the estate. Spending the money necessary to have your will and trust professionally prepared will likely lead to a better result.Published July 11, 2017. Updated July 17, 2017.