Estate Planning Mistakes to Avoid

Estate planning mistakes are something I see all too often in my job as an attorney. It seems like weekly I have a client come into my office with an “estate plan” that is going to solve all of his problems. Usually it is, NOT SO!! Most recently a gentleman brought an “irrevocable personal residence trust” into the office. It was created for him by his insurance agent. Why do folks trust non-attorneys with their legal work? This would be the number one item on my estate planning mistakes to avoid list.

In this case, the gentleman had no clue why this trust was created. Usually an irrevocable trust is used for asset protection, however, this gentleman was already retired when the “living trust” was established. He had almost a zero chance of lawsuit. I think the agent was trying to create a living trust for estate planning purposes, but that is not what happened. That agent was not legally trained. I wonder if he created the wrong type of document by accident or on purpose. This is a second item on my estate planning mistakes to avoid list. Be sure to avoid getting the wrong documents for the purpose. If you use the wrong document you never get the protection you think you have.

An irrevocable trust isn’t a “living trust” usually used for estate planning. Because the irrevocable trust is “irrevocable” it can never be changed. Changing a trust is often required by changing life circumstances. Also, in an irrevocable trust someone other than the owner of the trust must be named as the trustee. Most folks want to manage their own property. The living trust allows you to change the trust and manage it yourself. The screwed-up trust the insurance agent / estate planner extraordinaire had created for this gentleman was truly extraordinary. The agent had made himself the trustee with one of the client’s children as a co-trustee.

The gentleman came to me because he wanted to sell the house. The long-gone insurance agent was no longer there to sign as the trustee. Fortunately, I was able to help the gentleman; a mechanism written into the trust allowed us to get a new trustee. It was required to go court and get a “court order.” I’ll always wonder if the agent was planning on getting a kickback from the attorney. We got the order. Now the gentleman can sell the house he lives in. This was another of the estate planning mistakes. Never have a stranger act as your trustee. It will cost time and effort to have them run your trust. And at times they may not be available to take care of your needs.

If you are doing standard estate planning – avoid probate –pass-property-to-the-kids trust work, YOU should be your own trustee. In only one in ten thousand cases is it appropriate for the attorney or as in the gentleman’s case an insurance agent to write himself in as trustee. Having an outside trustee will cost you time and effort to have them run your trust. And at times they may not be available to take care of your needs.

It is almost always another of the estate planning mistakes to take your personal resident out of your name. The gentleman in this case will need to pay about $20,000 in income taxes on the sale of his residence, because he is not holding his home in his name, This is because the irrevocable trust owns his house. He loses the personal tax benefits, and doesn’t get the benefit of selling his “personal residence.”

You can hold your home in a living trust. The standard living revocable trust, aka a living trust has you as the grantor (guy who creates the living trust), you as the trustee (guy who manages the living trust), and you as the beneficiary (guy who gets all the benefits from the living trust). If the living trust is revocable and the same guy holds all three positions in the living trust, it is known as a “grantor trust.”

If you have a grantor trust (the standard living revocable trust) the IRS will ignore the trust for tax purposes. This means you don’t need a tax ID number for your trust. You will file your 1040 tax form using your social security number. If you put your house into the living revocable trust, you still get the tax benefits, i.e., deduct the interest, sell the house after living there, and get the profit tax free, etc.

Estate planning mistakes are problems I see all too often in my job as an attorney and I’m on a mission to stop the abuse. For a great read and education on living trusts just click and get a discounted copy of Protecting Your Financial Future.

By Lee R. Phillips