Living Trust

Problems With A Living Trust

There are some problems that can arise with a living trust, based mainly on misinformation. Learn what the most common problems are with a living trust and how to avoid them.

There are some problems with a living trust, and most of these are simply misinformation or confusion as to what a living trust can and cannot do. Below is a list of common misconceptions about a living trust. These misconceptions can create problems with a living trust, so it is better to be aware of your limitations in advance.

• Protection from lawsuits—A lot of people are under the misconception that a living trust will shelter assets from losses and that is not the case unless you set up an irrevocable trust. But, when you do that, you now have lost control over the asset. An irrevocable trust is a means by which people forever relinquish control of an asset. They may keep the income that the asset generates, but they now have lost control of the principle. Because they don’t have the principle, it cannot be attached in any lawsuit. However, they’re still getting income from that asset, which means that that income can be attached in a lawsuit.

• Income taxes—one problem that some people have with a living trust is that they think it will affect their income taxes. This is a common misconception, though. A living trust has no effect whatsoever on income taxes.

• Medicaid affectation—one problem with a living trust is that people incorrectly believe that setting one up can help qualify you for Medicaid. This isn’t true, though, and if a person creates a living trust for this purpose, they will have a lot of unforeseen problems.

• Refinancing—one problem with a living trust occurs when a person decides to refinance their home after it has been transferred to the trust. But when they want to refinance and take advantage of the low interest rates that are out there right now, the lender will require that the home be transferred out of the trust first. This isn’t a problem; it just takes a little time and paperwork. The problem with the living trust develops if lender fails to create the deed that transfers the home back into the trust after the lending process is completed. This actually happens often, and people typically fail to catch that on their own. They are not lawyers themselves. They’ve gone to this lending institution and figure everything will be taken care of and all the lender really cares about is getting a commission off the loan and doesn’t really look at the follow up, which is transferring the home back into the trust. To avoid this problem, every couple of years you should review your trust to make sure that your assets are in the name of the trust.

• Changes to the trust—another common problem that develops with a living trust is when a person wants to make changes to the trust. While it can be done, as long as the trust is revocable, there are a couple of issues that can create problems if you are unaware of them. A trust is considered to be a contract, a contract between the trustor or grantor and the trustee. Because it is a contract, it’s not appropriate to make pen and ink changes to the pages of that contract and then simply date and initial it. This isn’t sufficient enough because a judge or anyone else could say that it was forged initialing. It could have been someone else’s pen and ink changes to the document and a forged initialing. Instead, you have to make a formal amendment, which is referencing the specific paragraphs that you want changed or deleted or completely rewritten. Then, have that change typed up, sign it, have it notarized, and include it with the original document. By doing this, you prevent unnecessary problems with your living trust.

As you can see from above, most problems with a living trust can be completely avoided by being well-informed about the capabilities of your trust. Knowing your trust’s limitations will enable you to avoid problem-causing situations.