What is the downside to a living trust?

Though many good reasons exist for making a living trust, which includes avoidance of probate and creation of privacy, there are also some severe negatives that must be taken into account. Here are the major disadvantages associated with the setting up and maintaining of a living trust:

1. Initial Setup Costs:

• One of the primary concerns when making a living trust would usually be the cost of its creation. Since it typically requires professional legal advice to ensure proper drafting and adherence to the various state laws, a living trust can be very expensive at the front end.
• Impact: Such legal fees are higher than for just drawing up a simple will. Such upfront charges can create some financial burdens, especially on the person who has a simple estate.

2. Ongoing Maintenance:

• Problem: Once you have set up your living trust, you must update it continually. This involves transferring assets into the trust, updating if your situation changes—for example, buying a new house or having a new child—and that all new assets are titled in the name of the trust.
• Impact: Unless properly maintained, some assets may still have to go through probate, defeating one of the major goals of the trust. The regular maintenance requires time, efforts, and sometimes additional legal fees.

3. Complexity and Paperwork:

• Issue: Much more paperwork and administrative actions must be taken to address the issue of creating a living trust than when a will is simply written, like issuing new titles to assets, changing the names of bank accounts, and revising the beneficiary designations, so that all of these are in compliance with the trust.
• Impact: All this can be very confusing, especially to those who are uninitiated into the intricacies of the law or even that of the financial world. It will take a lot of time and a high level of attention to detail to get it right.

4. No Immediate Tax Benefits:

• Problem: A revocable living trust offers no current income or estate tax advantages since the grantor retains control over the trust and its assets.
• Impact: If reducing taxes is a high priority, then there are other estate planning tools (such as an irrevocable trust) that might better serve the client's purpose. The living trust will not shield the assets from estate taxation when the grantor passes away.

5. Protection Not Provided Against Creditors:

• Problem: Assets in a revocable living trust are not safe from the grantor's creditors because the latter is still in control of the trust, and creditors can seize these assets to satisfy outstanding debts.
• Impact: This lack of protection of assets may not be suitable for people looking to protect their assets from future liabilities or lawsuits.

6. Potential for Legal Challenges:

• Problem: Although less prevalent than will contests, claims against a currently living trust are nevertheless possible by disappointed heirs or beneficiaries who could claim undue influence, lack of capacity, or improper execution.
• Impact: If someone brings a legal challenge to the living trust, litigation could occur that will be every bit as expensive and time-consuming as contesting will. This totally defeats the privacy and probate avoidance benefits of the trust.

7. Not a Substitute for a Will:

• Problem: Even with a living trust, a "pour-over" will is often necessary to address how assets not in the trust at the time of the grantor's death are to be handled and to appoint guardians for minor children.
• Impact: A living trust doesn't make a will obsolete. This can make estate planning more complicated and require more documentation and planning.

8. May Not Be Necessary for Small Estates:

• Problem: For people of modest income, probate is relatively simple and less expensive, particularly in states that have streamlined procedures for small estates.
• Result: Because the administrative time required for a living trust and the cost of its setup and maintenance offset its advantages, it may be more practical assistance to have a basic will.

9. Incapacity Planning Involves Understanding How a Trust is Administered

• Problem: Upon the incapacity of the grantor, the successor trustee will be required to administer the trust under the terms of that trust. This is a job entailing some knowledge about trust administration.
• Impact: A successor trustee who does not know anything about managing trusts can easily make mistakes, leading to probable legal and financial implications.

Conclusion:

Although the living trusts have some very major advantages as an estate planning tool, they are not without their drawbacks. Knowing what these drawbacks are can help individuals make an informed decision as to whether a living trust is appropriate for them and their particular needs and circumstances. An estate planning professional can provide this advice, individually tailored to the needs and priorities of the person seeking advice, while ensuring that the estate plan reflects long-term goals and priorities. At One Pacific Trust, our vision is to be the leading provider of trust services.