Disadvantages of a Living Trust
- Up Front Cost -- This is the only clear disadvantage of a living trust. It will almost certainly cost you more up front than a simple will with a testamentary trust. To find out why click on the link above. [To learn more check out Living Trust Attorney Fees. It is probably not the best idea to try to cut down on the costs with a Do Your Own Living Trust kit.] But, as discussed below, and elsewhere, in the end, usually a living trust will pass assets more cheaply than going through probate (assuming you have assets that will have to go through probate.
- No Supervision by Probate Court -- Normally, the lack of involvement by a probate court in the functioning of the living trust is viewed as a good thing. In fact, this is one of the major factors that can save your estate money. However, certainly, there are some situations when you might want to have a probate judge oversee the process and ensure your interests, and the interests of your loved ones, are protected.
These cases don’t arise often, but if your family is particularly contentious; or if you fear that one or more of its members might try to take unfair advantage of the situation -- you might appreciate knowing that a probate court judge will be in charge of ensuring your estate is distributed the way you intend. In that case, you would not want a living trust. You would want your assets distributed through your will and the normal probate process.
- Taxes -- As a general rule, there is very little tax difference whether you hold and distribute your assets through a living trust or through the traditional probate process. But you should know there are some minor tax disadvantages when your assets are distributed from a trust as opposed to through the traditional probate estate process. One disadvantage is that a trust has to pay taxes based on a calendar year; whereas, an estate has the option whether to pay taxes on a calendar year or fiscal year basis. Also, an estate is entitled to a $600 a year income tax exemption, a trust only gets a $100 or $300 income tax exemption depending on whether it is a "simple" or "complex" trust. An estate also has fewer restrictions than a trust on the types of businesses it can hold. Also, if you fund the trust during your life, and someone other than you serves as the trustee (unusual), then state and federal tax returns will have to be filed for the trust and some rather complex tax rules kick in.
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- Funding Issues -- are a significant concern if you are considering a living trust. IF you want to take full advantage of a living trust you will need to fund it during your lifetime. This is the only way a living trust can be used to avoid probate and there are other advantages as well to funding a living trust during your lifetime. The problem is that funding the trust will take time, effort and likely some money to do. Ultimately, the time, effort and money you spend funding the trust now will almost certainly save your heirs much more time, effort and money later on. But, for you, for now, funding a living trust is obviously harder than not having a living trust at all.
Summary: the first three disadvantages listed above are worth mentioning, but are normally relatively minor issues. The funding issue, on the other hand, is a big issue. If you are thinking of getting a living trust, you need to really think through whether and how you will fund it. The rewards of funding a living trust in your lifetime can be great, but if it is not done correctly, the trust may not accomplish your objectives. Generally speaking, if your estate is sufficiently large or complex, the disadvantages of a living trust will be far outweighed by its advantages.
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