A well-drafted rust is one of the most effective estate-planning tools that you may have at your disposal if you want to avoid probate, protect your family’s assets, plan for your long-term care and ensure that your wishes are carried out after your passing.
However, even a powerful tool like a trust can become useless if you do the wrong thing. At a minimum, even small mistakes have the potential for big consequences – like inheritance delays, disputes between beneficiaries, tax issues and lost protections. Here are some of the most common mistakes New Yorkers make when they’re creating a trust:
1. Failing to properly fund the trust
Drafting the trust is only the first step. Funding the trust is the next. To work as intended, assets must actually be retitled into the trust’s name. Many people assume that signing the trust agreement alone is enough, only to discover after death or incapacity that:
- Real estate was never deeded into the trust
- Bank or investment accounts remained in the individual’s name
- Beneficiary-designated assets weren’t coordinated with the trust
In New York, unfunded or partially funded revocable trusts frequently fail to achieve their primary purpose – which is usually avoiding probate. A pour-over will can help transfer remaining assets, but it still requires going through Surrogate’s Court, so properly funding a trust is essential.
2. Choosing the wrong kind of trust
There are a lot of different kinds of trusts out there that can be used: revocable, irrevocable, Medicaid Asset Protection Trusts, Supplemental Needs trusts, testamentary trusts, incentive trusts and more. Using the wrong structure can undermine or outright thwart your goals.
For example, a New Yorker worried about asset preservation in their senior years might mistakenly use a revocable trust – which offers zero Medicaid protection. Or, they might try to rely on a testamentary trust created by their will to avoid probate – without realizing that the will has to go through probate before the trust activates.
Selecting the right trust for your needs requires a clear understanding of how each is structured, their limitations and the way that the law, taxes, creditors and family dynamics all intersect.
3. Forgetting to make updates
A trust is not a “one and done” kind of deal. You need to review and update your documents periodically to make adjustments where necessary. Depending upon the type of trust you create, you might have:
- Outdated trustees that should be changed
- Beneficiaries who should be removed or added
- Newly acquired assets that need to be transferred
- Changes in the tax laws or Medicaid laws that must be addressed
Regular reviews of your trust documents with your attorney can make sure that you still have the estate plan you want.
4. Choosing the wrong trustee
Choosing a trustee to manage the trust is one of the most critical decisions you have to make in the whole process – and far too many people make the decision based on emotion, not logic. Trustees have fiduciary obligations under New York law, including investing prudently, managing assets responsibly, and providing accountings when required.
Common mistakes include choosing:
- Someone with poor financial skills
- Adult children who do not get along
- Out-of-state trustees who may face complications
- Individuals who are irresponsible or unorganized
In many cases, a corporate trustee – such as a bank or trust company – can provide professionalism, neutrality and continuity without the interpersonal conflict that often arises when a family member tries to handle the job.
5. Assuming a trust avoids all taxes
A trust can provide tax advantages, but it is not a tax-avoidance tool by default. In New York:
- Revocable trusts offer no income or estate tax benefits during life.
- Irrevocable trusts may shift tax burdens to your heirs or create new filing requirements.
People often misunderstand grantor trust rules or overlook tax filing requirements, which can lead to penalties or unexpected liabilities. Worse, the problems may not surface until the grantor is incapacitated or dies, when it is too late to fix things.
Ultimately, a trust is only useful when it is structured soundly, funded properly, updated regularly and placed in the hands of a trustee who has the necessary skills to manage it correctly. Working with an experienced estate-planning attorney ensures that your trust accomplishes its intended purpose and provides the protection you and your family crave.
