Founding Attorney
Trusts have gained popularity as a key estate planning tool, especially among individuals with substantial assets or complicated family situations. They offer advantages like bypassing the costs, public scrutiny, and delays of the probate process. However, while trusts can be appealing, they aren’t the best option for everyone. Before deciding if a trust is right for your estate plan, it’s important to weigh both the advantages and some common drawbacks. Understanding the potential downsides will help you make an informed decision that suits your family’s unique needs. Here are some of the disadvantages associated with trusts.
Costs
Trusts help clients avoid probate and its related expenses, but they aren’t free. Trust-related costs are typically incurred during the initial planning and structuring of the trust and may also include administration expenses:
- Legal counsel to prepare and draft the trust
- Property registration and title transfer fees
- Filing fees
- Compensation to the trustee managing the trust
These expenses can be burdensome, especially for smaller estates.
Funding the Trust Can Be Complicated
Funding a trust can be one of the more complicated aspects of estate planning. Once a trust is created, assets must be transferred into it for the trust to function as intended. This process often involves retitling property, bank accounts, and other assets into the name of the trust. The paperwork and legal steps can be time-consuming and require careful attention to detail.
Many people make the mistake of creating a trust but not fully funding it, which can result in certain assets still being subject to probate. Without proper funding, the trust may fail to achieve its intended goal, leaving beneficiaries to navigate probate court for untransferred assets.
Assets You Cannot Put in a Trust
While a revocable trust can be a useful estate planning tool, certain assets may not be ideal for inclusion. Here are some assets that typically shouldn’t be placed in a revocable trust:
- Retirement Accounts: Assets such as IRAs, 401(k)s, and pensions should not be transferred into a revocable trust because it can trigger immediate taxation. Instead, you can designate the trust as a beneficiary, allowing for better control without negative tax consequences.
- Health Savings Accounts (HSAs): Like retirement accounts, transferring HSAs into a trust can create tax issues. Naming a beneficiary for these accounts is a more tax-efficient approach.
- Vehicles: Unless specifically required by state law, placing vehicles in a trust can cause administrative burdens. In some cases, it may also impact insurance or registration.
- Personal Checking and Savings Accounts: For day-to-day use, it’s often easier to keep these outside the trust to avoid complications with accessing funds.
- Annuities with Restricted Transfer Provisions: Some annuities cannot be transferred without penalty, making it unwise to include them in a revocable trust.
Lack of Court Supervision
Bypassing probate is a key advantage of trusts, but it comes with the downside of limited court supervision. In probate, the court ensures that assets are distributed according to the will, providing oversight. With a trust, there is no automatic judicial review.
While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing. This process can be time-consuming and costly, leading to disputes. The lack of built-in protections can pose significant challenges if the trustee is not managing the trust ethically or responsibly.
Lack of Protection from Creditors
A revocable trust offers some advantages over probate, but it also lacks certain protections. One key difference is creditor access. In probate, creditors have a limited time to file claims against the estate, but assets held in a revocable trust remain vulnerable to creditors as long as the grantor is alive. Because the grantor retains control over the trust, the assets are still considered part of the estate, making them accessible to creditors. On the other hand, while probate is a more time-consuming and public process, it does provide a defined timeline for addressing creditor claims. If protecting assets from creditors is a concern, a revocable trust may not offer the same level of security as other estate planning tools.
Get Help from an Experienced Texas Estate Planning Attorney
At the Law Office of Carey Thompson, we provide personalized estate planning solutions, helping you navigate the complexities of trusts and other legal tools. Our goal is to ensure your assets are protected, and your family’s future is secure. Contact us today to schedule a consultation and get started.