Many people do the right thing by having a living trust prepared. After all, why would anyone subject their heirs to a lengthy, costly and needless probate process. But these same trustees fail to investigate how to make the most of the trust and feel that the "job is done" once they have their trust completed. In fact, many people make enormous errors which can be extremely costly.
Error #1: Leaving assets outright to heirs. The trusts that I see leave assets outright to heirs which means that the heirs are free to squander the assets and the heir's creditors are free to attach these assets. Wouldn't it make more sense to leave assets to heirs in trust so that they will be protected from outside forces and so that you can also control the squandering of the assets? Additionally, by leaving assets in a trust, they can be kept out of the heirs estates, so as to avoid estate taxes again. It's an often observed phenomena that the next generation dissipates the wealth created by the parents. In my observation, the parents are sometimes contributors by leaving the assets to heirs outright.
Error #2: Failure to mange the bypass trust correctly. When one spouse dies, a bypass trust is created and funded with assets of the deceased spouse. Many people give no thought to which assets to place in the bypass trust and how they should be managed. Assets in the bypass trust should have two objectives—grow as much as possible and generate no taxes. In fact, I see these assets managed incorrectly most of the time in the following way.
The surviving spouse invests the bypass assets to generate income for his/her own benefit. At the same time, their own assets are growing in value (e.g. stocks, house) and become subject to estate taxes. This makes no sense. In fact, the surviving spouse should spend down their own assets (to insure that those assets will be below the estate taxable level--$625,000 in 1998) while allowing the assets in the bypass trust to grow as much as possible.
In fact, one of the best uses of a bypass trust is to use it as an irrevocable life insurance trust. Such an arrangement can pay off several times to the heirs, through completely tax free life insurance benefits.
Error #3: Selecting the wrong successor trustee. I see many parents select one or all of their children as successor trustee. This can be a formula for disaster and create hard feelings among siblings, misunderstandings and even costly mistakes if the children do not have business savvy. I always encourage selecting an independent trustee who is knowledgeable in estate matters and can settle an estate efficiently. An attorney, accountant or financial advisor is a good choice. Some of our clients have selected us to act in that capacity and we invite your inquiries about that service.