What Are the Disadvantages of a Trust?

Trusts are often touted as one of the most effective tools for estate planning. They offer benefits such as probate avoidance, potential tax savings, and control over asset distribution. However, it’s important to approach the decision with a clear understanding of the downsides. While trusts are a valuable resource for many, they are not a one-size-fits-all solution. In this article, we’ll explore the lesser-discussed disadvantages of setting up a trust and why, for some people, a trust may not always be the best choice.

Cost and Complexity of Creation

Creating a trust requires more time, effort, and money than a standard will. While wills can often be drafted using a more straightforward process, trusts demand careful planning, legal expertise, and often the help of professionals to ensure they’re set up correctly. The complexity increases if you’re establishing more intricate trust structures, such as irrevocable or dynasty trusts, which can involve complex legal and tax implications.

Not only is there an initial cost to set up the trust, but ongoing expenses for administration can also add up. Trustees, especially professional or corporate trustees, charge fees for managing the trust, and legal or accounting assistance may be required periodically to ensure compliance with changing laws or trust terms. These costs may not be justifiable for smaller estates where the benefits of the trust don’t outweigh the administrative expenses.

Maintenance and Management Responsibilities

Once a trust is created, it’s not a “set it and forget it” type of arrangement. You must actively maintain and manage the trust, ensuring that assets are correctly titled in the trust’s name. People often make the mistake of setting up a trust but forgetting to transfer assets into it, rendering the trust ineffective. This process of funding the trust can be tedious, as it involves retitling property, accounts, and other assets to reflect trust ownership.

Additionally, if you acquire new assets over time, such as real estate or business interests, you need to make sure they are also transferred to the trust. Neglecting to update the trust as your financial situation evolves can lead to unintended consequences, such as certain assets being subjected to probate despite the existence of the trust.

Limited Control in Irrevocable Trusts

While revocable trusts allow you to maintain control over the assets during your lifetime, irrevocable trusts do not. Once you establish an irrevocable trust and transfer assets into it, you typically relinquish control over those assets. The trustee has the legal authority to manage the assets according to the terms of the trust, but you no longer have the flexibility to alter the trust or retrieve those assets at will.

For some, this loss of control can be unsettling. The permanence of an irrevocable trust can feel restrictive, especially if your financial circumstances change or if you realize later that the terms of the trust no longer reflect your wishes. While irrevocable trusts offer advantages, such as asset protection from creditors or reducing the taxable estate, the trade-off is that you must be willing to let go of the assets in question.

Difficulty in Choosing the Right Trustee

Choosing the right trustee is a critical decision. This person or institution will be responsible for managing and distributing your assets according to the terms of your trust. However, selecting a trustee can be more challenging than it seems. A close family member or friend may be trustworthy but may lack the expertise needed to handle complex financial or legal issues that could arise during trust administration. On the other hand, hiring a professional or corporate trustee ensures expertise but comes with additional costs and the possibility of impersonal management.

Trustees are also subject to fiduciary duties, meaning they must act in the best interest of the beneficiaries. While this is designed to protect the trust’s assets, it can lead to tension between the trustee and the beneficiaries if they disagree on decisions related to the trust. Mismanagement or failure to properly administer the trust can lead to legal disputes, which can diminish the value of the assets held in trust.

Potential for Family Conflict

One of the key advantages of a trust is that it allows you to outline specific instructions for how and when assets will be distributed to beneficiaries. However, this control can sometimes lead to conflict among family members, particularly if the beneficiaries perceive the distribution terms as unfair or too restrictive. For example, a trust might include provisions that delay distribution until a beneficiary reaches a certain age or achieves a specific milestone, which some beneficiaries may see as overly controlling.

In some cases, the trustee’s discretion over distributions can create friction, especially if the beneficiaries feel that the trustee is not acting in their best interests or is too conservative in making distributions. Family dynamics can already be strained after the death of a loved one, and a complicated trust structure has the potential to intensify those emotions, leading to disputes that could have been avoided with a simpler estate plan.

Trusts Don’t Always Avoid Probate

One of the most popular reasons people set up trusts is to avoid the probate process, which can be time-consuming and costly. While a properly funded trust can indeed bypass probate, this only applies to the assets that are transferred into the trust. If you forget to move an asset into the trust, that asset will still be subject to probate. This is a common oversight, especially for individuals who fail to update their trust after acquiring new assets.

Moreover, even though a revocable trust avoids probate, it does not provide creditor protection during your lifetime. Since you retain control of the assets in a revocable trust, creditors can still access those assets to satisfy any claims, potentially undermining one of the perceived benefits of trust planning.

Unforeseen Tax Implications

While trusts can offer tax advantages, they also come with potential tax complications. The income generated by trust assets may be subject to higher tax rates, depending on the type of trust. For example, the income tax rates for irrevocable trusts are often higher than those for individuals, meaning that trust income may be taxed at a higher rate than if the assets were held personally. Additionally, some trusts are subject to the generation-skipping transfer tax, which can further complicate estate planning efforts.

Failing to properly account for the tax implications of a trust can result in unexpected financial consequences for both the grantor and the beneficiaries. It’s essential to work closely with a knowledgeable estate planning attorney or tax professional to ensure that the trust is structured in a way that minimizes tax liabilities.

About the Author

Gideon Alper is an attorney who specializes in asset protection planning. He graduated with honors from Emory University Law School and has been practicing law for almost 15 years.

Gideon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.