Common Mistakes to Avoid When Creating a Trust

Creating a trust can be a powerful tool for estate planning, offering benefits like asset protection, tax advantages, and control over how your assets are distributed after your passing. However, the process is complicated, and even minor oversights can lead to significant issues, including legal disputes, financial losses, or the trust failing to serve its intended purpose. 

As an experienced estate planning attorney, I, David W. Walker, Attorney at Law, can help you traverse the process with confidence and make sure your trust is legally sound and effective. Located in Columbia, Missouri, my law firm, Ford, Parshall and Baker, also serves clients in Jefferson City, Fulton, and Boonville.

Let's explore some common mistakes people make when establishing a trust in Missouri and provide guidance on how to avoid them.

Failing to Understand the Type of Trust Needed

One of the most significant mistakes isn’t selecting the appropriate type of trust for your specific needs. Missouri law recognizes various types of trusts, such as revocable living trusts, irrevocable trusts, testamentary trusts, and special needs trusts, each serving distinct purposes.

• Revocable living trust: Allows you to retain control over assets during your lifetime and avoid probate upon death.

• Irrevocable trust: Offers asset protection and potential tax benefits but restricts your ability to modify or revoke the trust.

• Testamentary trust: Created through a will and takes effect after your death, often used to manage assets for minors.

• Special needs trust: Designed to provide for a disabled beneficiary without jeopardizing eligibility for government benefits.

Mistake: People often choose a trust based on general advice or trends without considering their unique financial situation, family dynamics, or long-term goals. For example, setting up an irrevocable trust without understanding its permanent nature can lead to loss of control over assets.

How to Avoid: Consult with an experienced estate planning attorney to assess your needs. Discuss your goals, such as avoiding probate, protecting assets from creditors, or providing for a special needs family member. An attorney can recommend the right trust type and make sure it aligns with Missouri law, which governs trusts under the Missouri Uniform Trust Code (MUTC).

Not Properly Funding the Trust

A trust is only effective if it’s properly funded, meaning assets must be legally transferred into the trust’s ownership. Many people create a trust but fail to retitle assets like real estate, bank accounts, or investment portfolios in the trust’s name.

Mistake: Failing to fund the trust can result in assets remaining subject to probate, defeating one of the primary purposes of creating a trust. For example, if you create a revocable living trust but leave your home titled in your individual name, the home won’t pass through the trust and may require probate.

How to Avoid: Work with your estate planning attorney to identify all assets that should be transferred into the trust. In Missouri, this may involve:

• Real property: Executing a deed to transfer real estate to the trust, confirming compliance with Missouri’s recording requirements (e.g., filing with the county recorder of deeds).

• Financial accounts: Retitling bank accounts, brokerage accounts, and retirement accounts to the trust or designating the trust as a beneficiary.

• Personal property: Creating a general assignment document to transfer items like vehicles, jewelry, or artwork to the trust.

Regularly review your trust to verify that new assets acquired after its creation are properly titled. For instance, if you purchase a new property, promptly transfer it to the trust to avoid probate issues.

Choosing the Wrong Trustee

The trustee is responsible for managing the trust according to its terms and Missouri law. Selecting an inappropriate trustee can lead to mismanagement, conflicts of interest, or failure to fulfill the trust’s objectives.

Mistake: Common errors include appointing a trustee who lacks financial acumen, has a conflict of interest (e.g., a beneficiary with competing interests), or is unwilling to serve. For example, naming a close family member as trustee might seem logical, but emotional biases or lack of knowledge can lead to disputes or mismanagement.

How to Avoid: Choose a trustee who is trustworthy, organized, and capable of handling financial and legal responsibilities. In Missouri, trustees are held to a fiduciary standard under the MUTC, meaning they must act in the best interests of the beneficiaries. Consider:

• Professional trustees: A bank, trust company, or an estate planning attorney with trust administration experience may be appropriate for intricate trusts.

• Successor trustees: Name backup trustees in case the primary trustee is unable or unwilling to serve.

• Co-trustees: Appointing multiple trustees can provide checks and balances but may complicate decision-making.

Discuss your choice with the potential trustee to confirm their willingness to serve and make sure they understand their duties under Missouri law.

Ignoring Beneficiary Designations

Many assets, such as life insurance policies, retirement accounts, and payable-on-death (POD) bank accounts, pass directly to named beneficiaries, bypassing the trust. Failing to coordinate these designations with the trust can undermine your estate plan.

Mistake: A common error is naming individuals as beneficiaries on accounts instead of the trust, which can lead to unequal distributions or assets passing outside the trust’s terms. For example, if your trust specifies that assets be distributed equally among your children, but your life insurance names only one child as the beneficiary, that child may receive a disproportionate share.

How to avoid: Review all beneficiary designations and verify that they align with your trust’s goals. In Missouri, you can name your trust as the beneficiary of accounts to make sure assets are distributed according to the trust’s terms. Work with your estate planning attorney and financial advisor to update designations for:

• Life insurance policies

• Retirement accounts (e.g., IRAs, 401(k)s)

• Bank and brokerage accounts with POD or transfer-on-death (TOD) designations

Be aware of tax implications, as naming a trust as a beneficiary for retirement accounts may have different tax consequences than naming an individual.

Neglecting to Update the Trust

Significant life changes, such as marriage, divorce, the birth of a child, or significant financial shifts, can render a trust outdated. Failing to update the trust can have unintended consequences, such as excluding new family members or including former spouses as beneficiaries.

Mistake: Many people create a trust and assume it will remain effective indefinitely without periodic review. For example, if you divorce but fail to update your trust, your ex-spouse might still be entitled to assets.

How to avoid: Review your trust every three to five years or after major life events. Revocable trusts can be amended or revoked by the grantor during their lifetime, provided they’re mentally competent. For irrevocable trusts, modifications may be possible through a process called “decanting,” which allows assets to be transferred to a new trust with updated terms.

Work with your attorney to make sure updates comply with Missouri’s legal requirements, such as proper execution and notarization of amendments.

Overlooking Tax Implications

While trusts can offer tax benefits, misunderstanding or ignoring tax implications can lead to unexpected liabilities. Missouri follows federal tax laws for trusts, but state-specific considerations also apply.

Mistake: A common error is assuming all trusts avoid estate taxes or failing to plan for income taxes on trust assets. For example, irrevocable trusts are subject to their own tax rules, and failing to account for these can result in higher tax burdens for beneficiaries.

How to avoid: Consult a tax professional familiar with Missouri and federal tax laws. Key considerations include:

• Federal estate tax: For 2025, the federal estate tax exemption is approximately $13.61 million per individual (subject to annual adjustments). If your estate exceeds this, an irrevocable trust may help reduce taxable assets.

• Income tax: Revocable trusts are typically “grantor trusts,” meaning the grantor pays taxes on trust income. Irrevocable trusts may require separate tax filings.

• Missouri taxes: Missouri doesn’t have a state estate tax, but income generated by trust assets may be subject to state income tax.

Proper planning can minimize tax liabilities and make sure the trust aligns with your financial goals.

Not Communicating With Family or Beneficiaries

Failing to inform family members or beneficiaries about the trust can lead to confusion, mistrust, or legal challenges after your passing.

Mistake: Keeping the trust a secret may result in beneficiaries being unprepared for their roles or responsibilities, leading to disputes. For example, if a beneficiary is unaware of the trust’s terms, they may contest it, believing they were unfairly treated.

How to avoid: While sharing every detail isn’t necessary, consider discussing the trust’s purpose and general terms with key family members or beneficiaries. This fosters understanding and helps prevent surprises. In Missouri, beneficiaries have specific rights under the MUTC, such as access to trustee accountings, so maintaining transparency can help minimize potential conflicts.

Contact an Estate Planning Attorney

Creating a trust is a strategic way to protect your assets, avoid probate, and make sure that your wishes are carried out. However, avoiding common mistakes is critical to confirm the trust’s effectiveness. For assistance, reach out to me at Ford, Parshall and Baker. As an estate planning attorney, I serve Missouri communities in Columbia, Jefferson City, Fulton, and Boonville. Contact me today to schedule a consultation.