10 Most Common Mistakes When Setting Up a Trust In New York

Trust formation is a critical component of estate planning, yet many individuals make costly errors during the process that can undermine their intentions and lead to unintended consequences. These mistakes can range from selecting the wrong type of trust to inadequate funding or improper document execution. Understanding these common pitfalls is essential for anyone considering establishing a trust as part of their estate plan, particularly in New York where specific state laws must be navigated carefully.

Major Mistakes People Make When Setting Up Trusts

Creating a trust without professional guidance is one of the most significant errors people make. While DIY trust kits and online resources are widely available, they often fail to account for individual circumstances and state-specific requirements. In New York, trust laws have distinct characteristics that require specialized knowledge to navigate properly.

A properly drafted trust must comply with New York’s Estates, Powers and Trusts Law (EPTL), which governs everything from trust creation to administration. Working with an experienced estate planning attorney ensures your trust documents meet all legal requirements and truly reflect your intentions.

1. Choosing The Wrong Type Of Trust

Many individuals select inappropriate trust structures because they don’t fully understand the options available. For instance, some people create revocable living trusts when their situation might call for an irrevocable trust for asset protection or Medicaid planning purposes.

In New York, where estate taxes can be significant with the state estate tax exemption being lower than the federal exemption, choosing between a credit shelter trust, qualified terminable interest property (QTIP) trust, or generation-skipping trust requires careful consideration of tax implications and family circumstances.

For example, high-net-worth New Yorkers might benefit from specialized trusts like Grantor Retained Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs) that offer specific tax advantages, while families with special needs members would find greater benefit in properly structured Supplemental Needs Trusts.

2. Inadequate Trust Funding

Creating a trust document without properly funding it is akin to building a vault but never placing anything inside. This fundamental error occurs with alarming frequency and can completely undermine the purpose of establishing the trust in the first place.

Many New Yorkers mistakenly believe that simply creating a trust automatically transfers their assets into it. However, each asset must be individually retitled or designated to the trust through proper legal channels. Real property requires new deeds, financial accounts need ownership changes, and personal property often requires assignment documents.

Unfunded or partially funded trusts can lead to probate proceedings that the trust was specifically designed to avoid. In New York, where probate can be particularly time-consuming and expensive, this mistake can cost heirs thousands in unnecessary legal fees and months or even years of delays.

3. Naming Inappropriate Trustees

Selecting a trustee based solely on family relationships rather than capability and willingness to serve often leads to problems. The trustee role carries significant legal responsibilities and requires financial acumen, impartiality, and organizational skills.

Many people name their oldest child or spouse without considering whether that person has the time, skills, or emotional capacity to handle the responsibilities. In complex family situations, this can lead to conflict, poor trust administration, or even breaches of fiduciary duty.

New York law imposes strict fiduciary responsibilities on trustees, and failure to comply can result in personal liability. Professional trustees, such as trust companies or bank trust departments, offer expertise and objectivity but come with fees that must be weighed against their benefits.

4. Overlooking Tax Implications

Many trust creators fail to consider the full tax ramifications of their trust structure. Different types of trusts have vastly different tax consequences at both the federal and state levels.

New York has its own estate tax with an exemption threshold lower than the federal exemption, meaning estates that wouldn’t owe federal estate tax might still be subject to New York estate tax. Without proper planning, a trust might fail to minimize these tax burdens as intended.

Income tax considerations are frequently overlooked as well. Revocable trusts are typically considered grantor trusts for income tax purposes, while irrevocable trusts may file their own tax returns and pay taxes at compressed trust tax rates, which reach the highest tax brackets much more quickly than individual rates.

5. Drafting Inflexible Trust Provisions

Creating overly rigid trust provisions without built-in flexibility to address changing circumstances can lead to frustration and potentially thwart the grantor’s ultimate intentions. Life circumstances, family dynamics, and laws change over time, particularly in states like New York where trust laws have undergone significant revisions in recent years.

Effective trusts include provisions for changing trustees, trust protectors who can modify certain terms, and decanting provisions that allow for trust restructuring if necessary. Without these flexibility mechanisms, beneficiaries might be locked into arrangements that no longer serve their needs or the grantor’s intentions.

New York’s Decanting Statute (EPTL 10-6.6) provides a legal framework for transferring assets from one irrevocable trust to another with more favorable terms, but the original trust must qualify under the statute’s requirements for this option to be available.

6. Failure To Update Beneficiary Designations

Many people create trusts but neglect to ensure their beneficiary designations on life insurance policies, retirement accounts, and other assets align with their trust strategy. This disconnect can completely derail an otherwise sound estate plan.

For example, if a New York resident creates a trust for asset management and avoiding probate but leaves their IRA directly to individuals rather than to the trust (when appropriate), those assets will pass outside the trust structure. This can lead to unequal distributions among beneficiaries or fail to protect heirs who need special provisions.

Regular review of all beneficiary designations in coordination with trust planning is essential, particularly after major life events such as marriages, divorces, births, or deaths in the family.

7. Ignoring State-Specific Requirements

Trust requirements vary significantly from state to state, and failing to account for New York’s specific legal framework can invalidate trust provisions or create unexpected outcomes. New York has its own requirements for trust creation, funding, administration, and taxation.

New York’s Rule Against Perpetuities, for instance, differs from many other states and limits how long certain trust provisions can control asset distribution. Additionally, New York has specific requirements for charitable trusts and unique provisions regarding trustees’ powers and duties.

Using standardized trust templates that don’t account for these state-specific nuances can create serious problems for trustees and beneficiaries down the line.

8. Neglecting To Plan For Incapacity

While many people create trusts focused primarily on what happens after their death, they often fail to adequately address the possibility of their own incapacity. This oversight can leave families struggling with difficult healthcare and financial decisions without clear guidance.

A comprehensive trust plan should include provisions for successor trustees to manage trust assets if the grantor becomes incapacitated. Additionally, it should work in conjunction with other incapacity planning documents like healthcare proxies, living wills, and powers of attorney that comply with New York’s specific requirements for these documents.

New York healthcare law has specific provisions governing who can make healthcare decisions in the absence of advance directives, but these default provisions may not align with the grantor’s wishes.

9. Unclear Distribution Standards

Vague or ambiguous language regarding when and how trust assets should be distributed creates unnecessary conflict among beneficiaries and places trustees in difficult positions. Phrases like “support” or “education” without further clarification leave too much room for interpretation.

For example, does “support” include paying for a luxury apartment, or just basic housing needs? Does “education” cover graduate school, trade school, or just undergraduate education? Without clear guidance, trustees must make judgment calls that may not align with the grantor’s intentions.

Well-drafted trusts include specific distribution standards and examples of what the grantor would consider appropriate uses of trust funds. They may also include provisions for milestone distributions, incentive provisions, or specific limitations on how funds can be used.

10. Forgetting To Document Your Intentions

Many grantors fail to clearly communicate the reasoning behind their trust provisions, leading to confusion, hurt feelings, or even legal challenges after they’re gone. Simply explaining your thought process can prevent significant family conflict.

Including a letter of intent or statement of wishes that accompanies the trust can provide valuable context for trustees and beneficiaries. While not legally binding, these documents help clarify the grantor’s motivations and values that informed the trust structure.

This is particularly important in blended families or situations where distributions are intentionally unequal, such as when one child has received significant lifetime gifts or has different financial needs than their siblings.

Need Help Creating A Trust Without Mistakes?

Establishing a trust is a significant step in protecting your legacy and ensuring your wishes are carried out correctly. By avoiding these common mistakes, you can create a trust that truly serves its intended purpose and provides peace of mind for you and your beneficiaries.

As New York trust lawyers, we at Zeus Estate Planning can help you navigate the complexities of trust creation and ensure your estate plan is properly structured to meet your specific needs. Our experienced team can guide you through each step of the process, from selecting the appropriate trust type to ensuring proper funding and administration.