Many people use revocable or living trusts in their estate plans.

Living trusts are very powerful planning tools you can use for all kinds of purposes. Trusts can avoid probate, protect your beneficiaries from their creditors or divorcing spouses and can provide for the family cottage, education for grandchildren or your favorite charities.

Many of these trusts are signed and then put away in a drawer or safety deposit box, not to be looked at again for years. This can result in an estate plan that does not work as intended.

Trusts, like any other tool in your shed, must be kept sharp. When a trust is part of your overall comprehensive estate plan, you should try to avoid the seven most common trust mistakes:

  • Mistake 1: Failing to title assets in the name of your trust
  • Mistake 2: Failing to update your trust
  • Mistake 3: Using form documents
  • Mistake 4: Choosing the wrong trustee
  • Mistake 5: Thinking your trust protects you from your creditors
  • Mistake 6: Thinking that assets in a revocable living trust escape estate taxes
  • Mistake 7: Forgetting your favorite charities.

    If you have not put your assets into your trust, also called "funding" your trust, you have lost some of the benefits of your trust.

    Any assets that are in your own name at the time of your death will need to be probated. However, any assets that are titled in the name of your trust at the time of your death will avoid probate and usually result in lower after death administration costs.

    Generally, except for qualified retirement funds and certain annuities, all of your assets should be transferred into your trust during your lifetime.

    A trust drafted as a qualified beneficiary for retirement funds and named as beneficiary of your qualified retirement assets preserves the "stretch out" of the distributions over the ultimate beneficiary’s life expectancy.

    Placing all of your assets in your trust means that all assets will be distributed according to the detailed instructions you leave in your trust. Having a trust without putting your assets into the trust is like buying a brand new car, but not filling it with gas: It looks great, but it does not go anywhere.

    Your trust should be reviewed at least once a year to make sure it still meets your needs.

    There are many changes that can trigger an update to your trust. There may be changes in your personal life such as births, deaths, mar riages or divorces. There may be financial changes in your life, such as job changes, retirement, the stock market going up or the stock market going down.

    There also are tax and non-tax changes in the laws. Congress never fails to pass some sort of a tax act every year. There also are changes in your attorney’s experience. The trusts I draft this year are better than the ones that I drafted in previous years as I learn and experience new things.

    Many people attempt to draft their own trusts by using forms found on the Internet or in legal software packages. Many attorneys also will use forms-based documents. When preparing a trust, the old adage "You get what you pay for" is very often true.

    The forms-based trusts usually treat everyone the same. For example, many form trusts have the provision that your successor trustees take over if you become disabled in the opinion of two physicians. Most of my clients would rather have their family making this decision instead of non-family members.

    Most forms-based trusts are also only will substitutes which provide upon your death that your property is distributed outright to your beneficiaries. For many, outright distributions are not the best protection for your beneficiaries. Many trust makers provide lifetime trusts for their children.

    With lifetime trusts, your children have control over and have access to the funds for their lifetimes for their needs, but there are two key protections.

    Firstl the lifetime trust protects the assets you leave to your children from your children’s creditors.

    And second, as long as the trust assets are not commingled with your children’s marital assets, the assets generally would be protected from being considered as marital assets in the event of a divorce property settlement.

    Many people choose their oldest child as their successor trustee. This may not always be the wisest choice.

    When choosing a trustee, make sure the person that you are choosing has the skill and talents to manage your assets. If a child has a substance abuse problem, has poor money management skills or is married to a predator, it may not be the wisest choice to name him or her as your trustee.

    You also may want to name multiple co-trustees to manage your assets during your disability or after your death.

    You also could name a professional trustee such as a bank or trust company to be a trustee or co-trustee during your lifetime or upon your disability or death. These professional trustees are in the business of managing assets for a reasonable fee.

    If you are not leaving the assets directly to a child as a result of substance abuse problems, poor money management skills, creditor issues or otherwise, an independent professional trustee making distribution decisions is often times better for family harmony.

    Most revocable living trusts are not creditor protection devices for the trust maker. Most living trusts are drafted so you have full authority to change, amend, alter or revoke the trust and you have full access to the assets in the trust. If you have full access to your trust assets, so do your creditors.

    Similarly, assets included in your revocable living trust are available or countable resources for Medicaid purposes.

    Properly drafted and funded trusts for both you and your spouse can, however, protect your trust assets from your spouse’s creditors and vice versa. A trust can also protect the assets you leave to your children from their creditors.

    Many people think if they put assets in a revocable living trust, those assets will escape estate taxes. Upon your death, any assets in a revocable living trust are considered your assets in your gross estate for estate tax purposes.

    In 2008, you can leave up to $2 million estate tax-free to your beneficiaries. However, you and your spouse can double the amount of assets that can be distributed estate tax free to your beneficiaries from $2 million to $4 million by using properly drafted and funded separate revocable living trusts.

    About 89% of Americans donate to charities during their lifetime. However, only about 3% of Americans provide for charities after they are gone.

    If you give regularly to a church or other favorite charity during your lifetime, your donations expire with you. These organizations that have depended upon your donations during your lifetime will no longer have those donations after you are gone, unless you provide for them. You may want to consider a bequest to your favorite charities after you are gone.

    SOURCE: in an article written by Matthew M. Wallace, an attorney and CPA with the law firm of Matthew M. Wallace, PC, in Port Huron, Michigan.