At its core, the purpose of estate planning is to ensure your assets transfer to your heirs as efficiently and effectively as possible. And that's where trusts come in.
Not only do they bypass probate—the often-lengthy legal process of validating your will—but they also leave behind precise, legally binding instructions for how to distribute and potentially maintain your assets. This can be especially critical if you have a beneficiary with special needs or one who is otherwise ill-equipped to manage an inheritance, or you're bequeathing complex assets that will require ongoing attention after you're gone.
That said, "establishing your own trust can be a minefield," says Kimberly Frank, a Schwab senior wealth strategist. Here, Kimberly and her colleague George Pennock, director of trust services consulting for Charles Schwab Trust Company, share four common missteps people make when setting up a trust—and how to avoid them.
Mistake No. 1: Failing to fund the trust
According to Kimberly, the biggest and most costly mistake she has seen people make when creating a trust is failing to fund it. "You'd be surprised how many people go through the effort and cost of meeting with an attorney to formalize their wishes, only to leave the trust empty," she says.
Once you've done the paperwork, you must follow up by retitling the appropriate assets in the name of the trust as instructed by your attorney. In the case of insurance policies and retirement accounts, retitling may be as easy as updating your beneficiary designations online. For bank accounts and nonretirement investment accounts, you'll need to reach out to your financial institutions. And for real estate or business interests, you may need to work with your attorney to properly transfer such assets into the trust.
"Any assets that aren't appropriately retitled may have to go through probate, which can be a very lengthy process," Kimberly says. And don't assume a so-called pour-over will—in which you decree that the property in your estate should be distributed to the trust upon your passing—will help your estate avoid probate. "It will simply make sure the assets eventually end up in the trust once the probate process has concluded," she says.
Mistake No. 2: Choosing the wrong trustee
Whether or not you're able to act as the trustee of your own trust during your lifetime, you'll eventually need someone else to manage the assets and execute transactions, including distributions, after your passing.
"Older adults often want to lean on their kids to fill these roles, but you have to think about whether family dynamics could get in the way," Kimberly says. "I've also seen grantors name their adult children and new spouse as co-trustees, which can lead to all kinds of conflict if they have competing interests or don't see eye to eye." In such cases, it may make more sense to appoint a close family friend or corporate trustee instead. You might also consider combining the two approaches, naming an individual and a corporate trustee as co-trustees.
Where the trustee resides may matter, as well. Some states, including California and New York, tax the income from trusts administered in their states. Certain states may also offer better protection from creditors than others based on where the trustee resides. "Depending on the size and complexity of your estate, where a trustee is located could matter significantly," George says. An estate-planning attorney can help you think through such considerations as part of the trust-creation process.
Mistake No. 3: Underestimating financial needs
When designing a trust, many people concentrate more on portioning out what they have rather than assessing what their beneficiaries might actually need. "I've seen people put $1 million into a trust thinking that will maintain their spouse's lifestyle," George says. "But what if that person lives another 10, 15, or 20 years? Part of your process should be understanding the assumptions that underpin your planning—and accounting for different scenarios. You don't want your loved ones to run out of funds."
In addition, think about the costs your beneficiaries might incur when maintaining cherished but potentially burdensome nonfinancial assets, such as property. Most houses, for example, require repairs and general upkeep, and those costs can be considerable for higher-priced or second residences.
Mistake No. 4: Failing to update your trust
Unless you're working with an irrevocable trust—which, once established, generally can't be modified or revoked—you may want to periodically make changes to your trust should circumstances, such as death or divorce, require it.
Kimberly recommends meeting with an estate-planning attorney at least every three to five years to address any such changes. It also makes sense to stay on top of changes in tax laws that could affect how trust assets are treated. For example, Congress is in the process of debating legislation that could include a variety of tax increases. One proposal under consideration would be drastically lowering the estate tax exemption from its current level of $11.7 million to as little as $5.8 million. (Read more about some of the proposals under consideration here.)
"The current higher level may remain in place through the end of 2021," Kimberly says. "While it's not certain what changes to tax law we could see, families should decide whether they'll execute any 'use it or lose it' gifting decisions as soon as possible, before any new laws are enacted that could impact their planning."
It's also possible that Congress could ban or make less effective other estate tax-planning strategies before the end of 2021, whether on the date any new laws are enacted or some proposed future date prior to the end of the year.
"Wealthy clients considering implementing any estate tax planning strategies should consider scheduling a meeting with their attorney as soon as possible to discuss their options," Kimberly adds. "Drafting and signing a trust can take time, as can transfers to trusts or individuals. Many attorney offices are also very busy given the current legislative climate, so don't delay."
Trust in the process
When designed correctly, a trust can help your heirs bypass the costs, delays, and headaches that often arise from probate proceedings. "The difference between a well- and poorly designed trust is usually the quality of the counsel you're getting," George says. "After all, your wishes are only as good as the trust designed to implement them."
A corporate trustee provides financial expertise, unbiased decision-making, and fiscal responsibility for the duration of a trust. Schwab Personal Trust Services, administered by Charles Schwab Trust Company, will:
- Administer your trust according to the terms of your trust.
- Invest your trust's assets to benefit future generations.
- Provide services with a competitive fee structure.
- Put the interests of the trust and your beneficiaries first.
Learn more or contact your Schwab financial consultant.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Charles Schwab & Co., Inc. ("Schwab") is affiliated with Charles Schwab Trust Company (CSTC), the corporate trustee for Schwab Personal Trust Services (SPTS). Schwab may introduce clients to CSTC but does not evaluate whether SPTS is appropriate for each client or recommend SPTS for any particular client. It is the client's responsibility to ensure that CSTC meets his or her trust needs and to conduct any due diligence that may be required before engaging CSTC.
Charles Schwab Trust Company and Charles Schwab & Co., Inc., do not provide legal or tax advice. Consult with your legal counsel and tax advisors about your particular circumstances.1021-17J2