What are the major disadvantages of Revocable Living Trusts?

While this instrument of estate planning offers significant advantages, there are at least disadvantages that a person needs to seriously consider prior to setting one up.

1. No Protection from Creditors: One of the main disadvantages of a Revocable Living Trust is that it does not offer any protection against creditors. This is because the grantor still has control over the assets subject to the trust, and since the grantor is entitled to amend or revoke the trust at any time, for liability purposes, such assets continue to be treated as his or her estate. This, in turn, makes such assets accessible to the grantor's creditors upon his or her death.
2. No Tax Benefits: There are no tax benefits accruing from Revocable Living Trusts, whereas, in the case of irrevocable ones, there are some. The assets of the trust continue to be a part of the grantor's taxable estate, and he or she is supposed to pay income taxes on all income derived from the assets of the trust. This means that a grantor does not benefit from estate tax savings and any other benefits accruable under the Income Tax Act that may be applicable in the case of irrevocable trusts.
3. Complexity and Cost of Administration: Although Revocable Living Trusts work to bypass the somewhat cumbersome and costly process called probate, they are indeed complex in nature, especially regarding setup and management. The establishment of a living trust involves drafting legal documents, transferring ownership of assets into the trust, and possibly updating beneficiary designations. Set-up costs can include legal fees, whereas ongoing expenses might involve professional assistance in managing the assets or updating the trust.
4. Limited Asset Protection: Whereas the Revocable Living Trust finds wide application in avoiding probate, it does not make adequate provision for asset protection. In cases of divorce or litigation, the assets under the trusts are still accessible to the grantor; hence, they can be divided or taken by courts of law. This reduces its effectiveness in asset protection for any given case.
5. No Privacy in Some Cases: Some areas in which the Revocable Living Trust proves effective in privacy for keeping personal matters private by avoiding probate also can be somewhat vulnerable. If the trust has major assets or if there is a dispute, some portions of the trust will be exposed as public records or even court actions.

Accordingly, the Revocable Living Trust serves to avoid probate and provides flexibility, but it does not provide tax or creditor protection, and is more complex and costly to manage in comparison with other estate planning options.