You are part of the small minority who has actually taken the time to plan your estate by executing a Revocable Living Trust and other Estate Planning documents. You spent time with a qualified attorney who specializes in Estate Planning and who helped you articulate your wishes. But will the persons you designated to carry out your wishes understand the legalese?
Ensuring that your carefully crafted plan will be carried out is just as important as creating the plan in the first place. Below are some common mistakes that people without proper guidance make when trying to interpret and carry out an Estate Plan.
1. Failure to Split the Trust on the Death of the First Spouse
Many married joint Trusts have some sort of "A/B" provisions that are used to plan for the estate tax and also used to provide a degree of control over part of the Trust. Upon the death of the first spouse, the Trust will instruct the Trustee to sub-divide the Trust into two sub-trusts, an "A Trust" for the surviving spouse's assets and a "B Trust" for the deceased spouse's assets. Often the surviving spouse is too overwhelmed with grief to deal with these seemingly complex provisions and ignores or overlooks this issue. This can create a bigger problem later in terms of estate tax and income tax, and can even adversely impact a beneficiary's share.
2. Failure to Obtain a New Taxpayer Identification Number
We all know that we use our Social Security Numbers ("SSN") to report income that is generated during our lives. However, after death, our Social Security Number should no longer be used to report future income. Any Trust that becomes irrevocable due to death must get a new Taxpayer Identification Number ("TIN"). Many successor trustees and family members make the mistake of continuing to report income on the decedent's SSN which can create a web that needs to be un-tangled at some point.
3. Failure to Understand the Nuances of the Distributions
Traditionally, after the death of the person(s) who created the Trust, the Trust would terminate and the beneficiaries would receive their shares in their own individual names. Modernly, it is exceedingly common for Trusts to create "in-trust" inheritances to provide benefits such as creditor protection, divorce protection, and further estate tax protection for the beneficiaries. However, often trustees and even their attorneys don't understand these nuances and simply distribute the assets free-of-trust to the beneficiaries, blowing these added benefits.
To ensure that mistakes such as those described above are avoided, it is good practice to introduce your successor trustees and family members to your estate planning attorney and to make sure that they understand that there are nuances that must be interpreted and understood. It is also important to make sure that they hire an experienced attorney to help guide them through this process.