Advantages and Disadvantages of a Trust
by Unbundled Legal Help
If you are in the beginning phase of creating a comprehensive estate plan, you most likely have already heard about the benefits of having a trust. While there are many notable advantages, there are also a few disadvantages to creating a trust that we want you to be aware of.
A few potential disadvantages to setting up a trust include the following:
- Not as many tax benefits as you may expect
- Requires many details
- No creditor deadlines
- Can be inconvenient for beneficiaries
- More expensive than creating a will
- Heirs have more time to contest the trust
Creating a trust can be complex and difficult to do on your own. Additionally, trusts are not a good option in every situation. Consult with a proven estate planning lawyer to learn if a trust is best for you and your beneficiaries.
Learn more about the disadvantages and advantages of creating a trust below.
What is a Trust?
A trust is a legally recognized agreement that allowing a third party or a trustee to hold, manage, and distribute assets or income from the trust to beneficiaries. Trusts help you avoid probate, reduce taxes (in some situations), and have more control over what happens to your assets when you pass away. There are trusts to fit a variety of situations. Learn more about the most common trusts in the next section.
Types of Trusts
There are two categories of trusts. One is a revocable trust (sometimes called a living trust) and the second is an irrevocable trust. Revocable trusts are created during the lifetime of the trust creator (otherwise known as the “grantor”) and can be changed, modified, or revoked.
Many use revocable trusts to avoid probate. While revocable trusts are great for avoiding probate, they are not the best option for protecting your assets and avoiding taxes.
Irrevocable trusts can’t be modified, changed, or revoked. After assets are placed into an irrevocable trust, no one can take property out of it. This can offer many benefits to the grantor and beneficiaries including estate tax savings, lowered income taxes, and avoidance of probate.
In addition to revocable and irrevocable trusts, there are a variety of other options that can fit your unique circumstances. Some of the most popular types of trusts include:
- Asset Protection Trust
- Charitable Trust
- Implied Trust
- Special Needs Trust
- Spendthrift Trust
- Tax By-Pass Trust
If you are unsure which type of trust is best for you, we recommend that you consult an estate planning lawyer to discuss your needs.
Disadvantages of a Living Trust
The advantages that trusts provide for grantors and beneficiaries are well-documented. However, there are some disadvantages you should be aware of before deciding to create a trust. Take a look at a few of the most commonly cited disadvantages to trusts below.
Not as Many Tax Benefits as You Think
If you’ve heard of a trust, then you’ve likely heard of the potential tax benefits from setting one up. While this can be true for an irrevocable trust, it is not so for revocable living trusts - which are popular types of trust.
If you wish to create a trust for tax benefits, it’s best to speak with a tax professional and estate planning lawyer to ensure that you are setting up a trust which will save you more than it costs.
Trusts are part of a comprehensive estate plan. Creating a trust requires in-depth knowledge of multiple disciplines that include taxes, estate law, and business. Before you set one up, you will need to create a will.
When creating trust agreements, every word matters. Not only will you need to draft an agreement, but the instructions must be clear, and you can only place certain types of assets within the trust. Additionally, you need to set up accounts to hold the assets, appoint a trustee or third party, and obtain a federal tax identification number with the trust.
No Creditor Deadlines
Estates that include a will and those estates without a will both go through the probate process (unless the property is placed in a trust or given away). While this can be a negative consequence, one potential positive from going through the probate process is that your creditors have a limited amount of time to file their claim against the estate.
By comparison, creditors have much longer to sue the trust or its beneficiaries for assets that they have a claim against. Creditors can even sue beneficiaries for claims they have against the grantor well after assets have been distributed.
Inconvenience for Beneficiaries
When a grantor creates a trust, they are essentially giving up their rights to assets in the trust. Everything within the trust is considered a trust asset. This can lead to inconvenient administrative procedures if trust assets are ever used as collateral by the grantor or beneficiary.
Additionally, beneficiaries can be greatly inconvenienced if they have to make repeated requests to the trustee to receive their assets. If the relationship between the trustee and the beneficiary is not strong, interpersonal issues may arise that create unnecessary barriers for your beneficiaries.
Can Be Expensive
Creating a trust can be beneficial for individuals across the economic spectrum (assuming they own assets). However, the cost of doing so often limits who can create a trust to those with enough money to afford it. Estate planning lawyers can charge anywhere from $3k - $7k to set up a trust, plus an additional hourly rate on top of that.
Some lawyers charge a percentage of the total value of an estate as a legal fee. This can lead to incredibly high pricing. That’s not even including the costs to administer the trust or compensate the trustee. In rare cases, individuals find that it is less expensive to go through the probate process than by creating a trust.
Your Heirs Have Longer to Contest the Trust
In many states, there is a limited amount of time for heirs to contest a will. This is typically 30 - 90 days. In comparison, heirs can have as long as five years or more to contest a trust. Statutes of limitations vary from state to state.
Many states are now reducing the time heirs have to challenge a trust. Contact your estate planning lawyer to learn more about the specific requirements and limitations that can affect you.
Advantages of Setting Up a Trust
Now that you are more aware of the disadvantages involved in setting up a trust, it is important to understand why millions of people choose to create a trust each year. Many want to avoid probate or gain tax benefits from irrevocable trusts. Others want more control of disbursements and find it important to keep their affairs private, etc. Learn more about the advantages of setting up a trust below.
Aside from leaving assets behind for beneficiaries and charities, the number one reason individuals set up trusts is the advantage they provide for avoiding the probate process. Probating a will can take up to a year and can incur expensive fees. Trusts make it easier, faster, and cheaper to pass property to heirs.
While revocable living trusts don’t offer so many tax benefits, irrevocable trusts do. You have no claim to the assets you place in an irrevocable trust, so your taxable income can be decreased as a result, and you can potentially lower or avoid estate taxes altogether.
In addition to tax benefits, placing property in a trust allows you to remain eligible for government benefits including Medicaid, Social Security, etc., and remain eligible for income from the trust.
Your Affairs Remain Private
If you transfer all of your assets through a last-will-and-testament, you should be aware that the probate process is public. This means that information about your assets, beneficiaries, and how your assets are distributed will be public knowledge.
Assets and property placed into a trust do not have to go through the probate, and they aren’t subject to the same amount of scrutiny. What you place in a trust, how your assets are distributed, and who are the beneficiaries, are only known by the trust creator, trustee, beneficiaries, and the professionals who help create the trust.
Trusts offer grantors more control over how their assets are distributed. While a will only allows certain types of distribution requirements and rules, trusts give grantors the ability to give specific or unique disbursement instructions.
You can instruct a trustee to disburse funds only on certain dates, at specific milestones, or when specific requirements are met. A will does not allow this type of flexibility or control.
Do I Need an Attorney to Create a Trust?
In short, yes. Creating an effective trust so that it is beneficial to you and your heirs requires knowledge of taxes, business, and the estate laws of your state. An estate planning lawyer can help ensure that your trust is effective, legally sound, and drafted in the best interests of you and your beneficiaries.
Estate planning lawyers offer other benefits to their clients that include:
- Legally avoiding or minimizing taxes
- Helping prevent litigation
- Faster and more streamlined payout processes
- Drafting and reviewing documents
- Serving as a trustee
You have the right to create a trust on your own, but it’s typically not in your interest. It is better to consult with a trust lawyer in your area to learn how you can benefit from their services.
Save Money with an Unbundled Lawyer Today
The biggest barrier to setting up a trust for most people is cost. With unbundled legal services, you can save thousands of dollars in upfront fees by hiring an unbundled lawyer who handles the complex parts of setting up a trust, while you save money by handling the rest.
Fees for unbundled trust lawyers start as low as $500-$1500. When your needs are more complex, our network of unbundled lawyers offers comprehensive estate planning services at affordable rates.
Before you spend thousands of dollars in upfront fees to create a trust, get instantly connected with an unbundled attorney, and learn if your estate planning needs are a good fit to be unbundled today.