What Are Common Misconceptions About Trusts?

What Are Common Misconceptions About Trusts?

Congratulations, you prepared your estate plan, including your family trust. You now believe that your assets are safe from probate, and they will pass to whom you’ve designated, in the manner you’ve designated. Everything, in your mind, has been taken care of. However, is this truly the case? Review some of the following common pitfalls and misconceptions below about trusts, to ensure your estate plan is ready and able to function as you intended.

How Do I Fund My Trust? 

A trust is a legal entity, created by a Trustor for the purposes of 1) avoiding probate, 2) reducing estate taxes, and 3) designating the who’s and how’s of the manner in which your estate will be passed on to your beneficiaries. However, for the trust to be able to provide these levels of protection, the trust must be funded. In other words, you must transfer your assets and accounts into the trust, to enable your trust to be able to function. Indeed, a trust without any assets or accounts can be viewed as mere fancy words on paper, void of any real power.

It should be noted that it is not necessary to transfer all of your assets/accounts into your trust, and each person’s circumstances will vary. Some assets are able to avoid probate based on the title in which they are held, or by the use of pay on death beneficiary designations. In addition, probate may be avoided if the total value of your estate is less than a certain amount, which in California is currently set at $150,000.

Due to the high cost of real estate in California, most people are advised at a minimum to transfer their real property into their trust. A surprisingly common mistake can be forgetting to transfer your house, or in particular, your new house after a recent move, into your trust. Failure to do so can leave your house exposed to shockingly high costs and fees in the probate process, all of which could have been avoided.

Does a Trust Eliminate Estate Taxes?

Another pitfall in establishing one’s estate plan is the notion that the language of your will or trust will take precedence over the language in your beneficiary designation forms. Say, for example, years ago when you set up life insurance, you named your nephew as the beneficiary to your life insurance. Now, when establishing your estate plan, you instead decide to name your child in your will or trust as the beneficiary to all your assets, including your life insurance proceeds. In the event of your passing, which beneficiary will receive the life insurance proceeds?

Even though your estate plan was established more recently, the person you named on your life insurance beneficiary designation (in this case, your nephew) will prevail in receiving the insurance money. This is because by law, the insurance company is required to make payment to the person named on the beneficiary form, regardless of the language of a person’s will or trust. Payable on death beneficiary forms are utilized in many situations, such as with life insurance or retirement accounts.  As such, it is of utmost importance to ensure your payable on death forms are current, and the beneficiaries named on these accounts in your estate planning documents mirror the beneficiaries listed on the forms.

Reviewing and Updating Your Estate Plan

As evidenced above, understanding how your trust can and cannot function presents a myriad of issues, not only during the initial preparation of your trust, but also in the years to come afterwards. One of the most unfortunate estate planning mistakes is to have your trust prepared, and then neglect to review or update your estate plan as time passes. Circumstances, life, and the law change. At the Law Office of Christine Padilla, we welcome you to contact us to establish or review your estate plan, to ensure your wills and trust will truly function as you intended.

Christine Padilla

Owner and Attorney at Law