Setting up a revocable living trust (RLT) can be an excellent way to manage your assets, plan for disability, avoid probate, and ensure your estate is handled according to your wishes. However, there are several common mistakes that people often make when establishing an RLT, especially in Washington state. Here, we highlight the biggest pitfalls and offer tips on how to avoid them.
1. Failing to Fund the Trust
One of the most critical steps in establishing a revocable living trust is funding it. This means transferring ownership of your assets into the trust. Many people create the trust document but forget to actually transfer their assets, rendering the trust ineffective. Make sure to transfer titles, deeds, and account registrations into the name of the trust to ensure your assets are properly managed. Then remember to continue to fund the trust with assets acquired after the trust is set up. Improperly funding a trust can lead to the need for both trust administration and probate upon death.
2. Assuming All Assets Can Go into the RLT
Not all assets are suitable for inclusion in a revocable living trust. For example, retirement accounts like IRAs and 401(k)s typically cannot be transferred into a trust. Placing tax advantaged accounts into an RLT could trigger unintended consequences.
3. Poorly Written Trusts
A revocable living trust must be drafted with crystal clarity to be effective. Poorly written or ambiguous trusts can lead to disputes, misinterpretations, and ultimately, a failure to carry out your wishes. Ensure your trust is written by an experienced estate planning attorney who understands Washington state law and can tailor the document to your specific needs.
4. Thinking an RLT Protects Against Creditors
A common misconception is that a revocable living trust offers protection from creditors. However, because the trust is revocable, you retain total control over the assets and they are still considered part of your estate for creditor purposes. To protect assets from creditors, consider other strategies such as irrevocable trusts or other asset protection tools.
5. Failing to Consider Long-Term Care Costs
Long-term care costs can quickly deplete your estate. When setting up a revocable living trust, it is essential to consider these potential expenses. Integrating Medicaid planning or purchasing long-term care insurance can help protect your estate from being drained by these costs, ensuring there is something left for your beneficiaries.
6. Thinking that having a RLT will help minimize estate taxes
A revocable living trust offers no tax protection for single individuals. If you are married, the trust must be structured correctly, and the proper elections must be made upon the death of the first spouse to minimize estate taxes. Failing to do so can result in unnecessary tax liabilities, which could significantly impact the estate's value.
7. Failing to Draft a Will
Even with a revocable living trust, a will is still necessary. A “pour-over” will ensures that any assets not transferred into the trust during your lifetime are transferred into the trust upon your death. This ensures that all your assets are managed according to the terms of the trust.
8. Failing to Coordinate Beneficiary Designations
Beneficiary designations on accounts such as life insurance policies, retirement accounts, and payable-on-death bank accounts must be coordinated with your trust. If the designations are not updated to reflect your trust, those assets may not be distributed according to your wishes and could bypass the trust entirely. Ensure all beneficiary designations align with your overall estate plan.
Conclusion
Establishing a revocable living trust can be a powerful tool for managing your estate, but it must be done correctly to be effective. Avoiding these common mistakes can help ensure your trust serves its intended purpose, providing peace of mind and protecting your legacy for your beneficiaries. If you're considering a revocable living trust in Washington, call us to guide you through the process and ensure all aspects of your estate plan are properly addressed.
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