Trusts Can Fail. Here’s How It Happens

As long as you create a trust and create it properly, it will do whatever it is that it’s supposed to do. It’s either done correctly or it’s not, but so long as it’s done correctly, it’s done and will operate as you intended it to operate.

At least, that’s the common thinking. But that’s not entirely true, because in some cases, trusts can and sometimes do, fail. How does a perfectly properly set up trust end up failing? Turns out there are a lot of ways that this can happen.

Not Transferring Assets

When you list the property that will be put into the trust, that doesn’t magically make it happen. The property you put into the trust, has to be transferred into it. That can be done through retitling property, or transferring assets into the trust.

But sometimes, that doesn’t happen—people say they want X, Y and Z to be put into a trust, and then they never take the steps to actually transfer the property into the trust. As a result, the trust has no property, and thus, fails.

Similar to the above, sometimes assets are to be put into a trust, but the assets disappear because the trust is not updated. For example, a business that is placed in trust may be defunct, or a residence may have long been sold, or a coin collection put into a trust, ends up being sold before the trust comes into play. Again, if the assets that are not supposed to be in the trust fails, the trust itself fails.

No Beneficiaries

It’s not just assets that may not be there. The beneficiaries to the trust may not be there either. In many cases, beneficiaries pass away before the trust comes into effect, and thus, there is nowhere for trust property to go. Those making a trust can designate backup beneficiaries—but they often do not, especially when beneficiaries are younger people.

Life Changes

Remarriages cause problems also. Something left to a spouse in a trust will be ineffective, if the spouse is no longer the spouse when the trust comes into effect. People often don’t update trusts when life situations change.

Vague Directions

Many trusts, especially discretionary ones, leave vague or inadequate directions for the trustee to distribute. They may allow distributions “for educational purposes,” or “as long as my brother keeps his life in order.” These kinds of vague, subjective requirements for distributions will cause fighting, litigation, and could end up in a trust that can’t distribute assets, or else, a trust mired in litigation.

Law Changes

Laws can change, that can make distributions impossible, illegal, or which can defeat the entire purpose of the trust or distributions. Tax law changes often make things that were once beneficial, not worth doing.

As laws change, your trust needs to be updated as well, to avoid failures.

Don’t let your trust fail. Call the Torrance probate will and estate attorneys at Samuel Ford Law today.

Sources:

academic.oup.com/book/10848/chapter/159037269

jdsupra.com/legalnews/if-terms-of-a-terminated-trust-fail-to-s-65559/