If you have created a Trust, or are thinking about creating one, you are already taking an important step toward caring for your family. But simply having a Trust does not always mean your family is fully protected.
One concern I see when reviewing existing Trusts is that they cover the basics but do not provide enough direction when life does not go according to plan. In fact, some common Living Trust mistakes may not become apparent until your family actually needs to administer the Trust.
What happens if your Trustee becomes incapacitated? What if a beneficiary dies, has Special Needs, or is not prepared to manage an inheritance?
These details matter. Your family should not be left trying to figure out what you would have wanted, especially while they are grieving or navigating a difficult time.
First, How Does a Trust Work?
Before we talk about what can go wrong, here is the basic progression:
The Trustmaker creates the Trust and decides how the assets should be managed and distributed. In many Revocable Living Trusts, the Trustmaker also serves as the Initial Trustee and continues managing their assets. If that person can no longer serve because of incapacity, death, or another circumstance covered by the Trust, the Successor Trustee steps in. That person follows the Trust’s instructions and manages the assets for the beneficiaries.
It sounds fairly simple. But problems can arise when the Trust does not explain what should happen when something unexpected occurs. If you created your Trust years ago, used a basic or online Trust, have minor children or a beneficiary with Special Needs, or have experienced changes in your family, it may be time for a review.
Cornerstone Legal can review your Trust or Estate Plan with you and help you understand what it says, what may be missing, and whether it still reflects what you want for your family.
Contact us at (517) 708-2222 or email Katrina@CornerstoneLegalPLLC.com.
Common Living Trust Mistakes
1. What Happens If My Trustee Becomes Incapacitated?
Choosing the right Trustee is an important decision. Some people choose a trusted friend or family member. Others choose an individual or company that provides Trustee services when an independent third party may be a better fit. One issue I often see is a Trust that does not provide a practical way to determine when a Trustee can no longer serve.
Some Trusts include what is commonly called a “two-doctor rule.” This provision requires two physicians to determine that the Trustee is incapacitated before a Successor Trustee can step in and act.
Requiring two doctors may sound like an extra layer of protection, but it can create unnecessary challenges for your family. Finding two physicians who are willing and able to make a formal incapacity determination can take time. During that delay, your Successor Trustee may be unable to step in and manage important Trust matters when help is needed most.
When we prepare a Trust, we want the incapacity provisions to provide appropriate safeguards without creating additional obstacles for your family during an already difficult time. We prefer to include an Incapacity Panel of individuals, chosen by you, who are given instructions on how to determine if you are incapable of continuing to serve as your Trustee.
2. Does the Trust Protect Beneficiaries After They Receive Their Inheritance?
There are different ways a beneficiary can receive an inheritance. One option is an outright distribution, which means the beneficiary receives the assets directly.
For example, if your Trust says your child receives their entire inheritance at age 25, those assets would be distributed to them at that time. The Trust would no longer provide ongoing structure or protections for those assets.
Instead of giving a beneficiary their entire inheritance through an outright distribution, the assets can remain in the Trust. The Trustee manages those assets and makes smaller, discretionary distributions to the beneficiary based on the instructions you included in your Trust.
Why would you choose this option? Sometimes giving someone complete control of an inheritance is not the best way to care for them. A younger beneficiary may need time to develop financial skills. A beneficiary with Special Needs may require more careful planning. Someone who struggles with spending or financial decisions may benefit from additional protection and guidance.
Keeping assets in Trust can give you more control over how and when an inheritance is used while allowing the Trust to continue providing protections for the beneficiary.
3. What Happens If a Beneficiary Dies Before Receiving Their Inheritance?
Your Trust should answer an important question: What happens to the inheritance of a beneficiary who dies before receiving it? Many Trusts use the term “per stirpes.” Generally, this means that if a beneficiary dies before receiving their share, that share passes to their descendants in equal shares.
For example, imagine you leave an inheritance to your two children. One child passes away and has two children of their own. A “per stirpes” provision would instruct your Trustee to distribute that deceased child’s share in equal shares to that child’s children – your grandchildren. This may be exactly what you want. But it should be a decision you understand and make intentionally, rather than simply relying on standard language in your Trust.
Every family looks different. You may have grandchildren, stepchildren, a blended family, a beneficiary without children, or someone else you would prefer to receive the inheritance.
When creating or reviewing your Trust, ask yourself: If this person is no longer here, where would I want their inheritance to go? Thinking through these possibilities now can help your Trust continue to reflect your wishes as your family changes.
4. Have I Named Enough Successor Trustees?
Choosing a Successor Trustee is not always easy. You are asking someone you trust to take on an important responsibility for you and your family. Finding one person who feels right can be difficult enough, so the idea of naming a second or even third backup may feel overwhelming.
Still, it is worth thinking a few steps ahead. The person you choose today may be unable or unwilling to serve when the time comes. Their health or circumstances could change, they could pass away, or they may simply decide they cannot take on the responsibility. Without enough options, your family will need to seek the intervention and guidance of the local probate court.
Naming additional Successor Trustees gives your Trust another path forward if your first choice cannot serve. You do not need to find several “perfect” people. Instead, think about who you trust to follow your wishes, make thoughtful decisions, and care for the people your Trust is designed to protect.
If you do not have another family member or friend who feels like the right choice, you may also consider a professional Trustee. This may be helpful when family dynamics are complicated, the Trust requires ongoing management, or you do not want to place the responsibility on a loved one. An Estate Planning attorney can help you understand the options available for your situation.
5. Is a Short, Simple Trust Really Better?
When you are handed a stack of Estate Planning documents, a short and simple Trust may sound appealing. We believe you should be able to understand your Trust and feel comfortable with the plan you are putting in place. But easy to understand does not have to mean short.
A Trust needs enough detail to guide the people who may someday have to use it. That may include instructions about when and how distributions should be made, what authority your Trustee has, how incapacity is determined, how beneficiaries are protected, and what happens when circumstances change.
These details become especially important when you are no longer available to answer questions. Your Successor Trustee may need to manage property, handle expenses, make distributions, or respond to a beneficiary’s changing needs.
When we review an existing Trust, we are not concerned simply because it is short. We are looking at whether it answers the questions your family and Trustee may face. Does it include backup plans? Does your Trustee have the authority and guidance needed to administer the Trust? Are your beneficiaries protected as you intended?
The goal is not to make your Trust longer or more complicated than necessary. The goal is to create a Trust that is clear, thorough, and designed for your family. Your Estate Plan should be something you can understand today and something your loved ones can rely on when they need it.
Your Trust Should Be Ready When Your Family Needs It
A Trust is meant to care for people, not simply hold assets. The real test comes when someone becomes incapacitated, a loved one dies, a beneficiary needs additional protection, or circumstances change.
If you already have a Trust, take the time to understand what it actually says. Does it still reflect your wishes? Does it give your Successor Trustee enough guidance? Does it protect your beneficiaries as you intended?
You do not need to know all the answers yourself. Reviewing your Trust with a Michigan Estate Planning attorney can help you identify areas that may need attention and make informed decisions while those decisions are still yours to make. A thoughtful Trust can give your family something incredibly valuable when they need it most: clear instructions about how you wanted them cared for.
Do You Need Help Setting Up or Reviewing a Trust?
Contact us at (517) 708-2222 or email Katrina@CornerstoneLegalPLLC.com.