When we talk about Living Trusts, we revolve around their advantages only that they avoid probate, reduce taxes, and provide privacy. But, there are a few disadvantages of a Living Trust which you must keep in mind while considering a Living Trust as part of your Estate Planning.
Meaning of Living Trust
Living Trust is a legal document of Estate Planning created by a person known as a “Grantor/Initial Trustee” who puts property into a Trust and enjoys the benefits of it during their lifetime and after death. Upon the death of the person, the property is managed by another person appointed by the Grantor called a “Successor Trustee”.
The people who inherit the Trust property upon the death of the Grantor are the “Beneficiaries”.
In Living Trust, Grantor has full control over the property and can enjoy the property till he dies by naming himself/herself as the Initial Trustee. After the death of the Grantor, the administration of Trust Property is dealt by the Successor Trustee; in this way, the the role of Successor Trustee is similar to the Executor of a Will.
Successor trustees are required to work in the best interest of the trust and its beneficiaries and not for their personal benefit unless the Declaration of Trust specifies it.
What are the disadvantages of a Living Trust?
1. Expensive to establish and maintain
The primary drawback of a Living Trust is that the cost required to establish them is relatively high compared to other documents of Estate Planning. Living Trusts often require assistance from an Estate Planning attorney and the Grantor is required to pay hourly fees for the creation of a Living Trust.
Even after the creation of the Trust document, a lot of money is required to maintain the Trust. Several trusts are managed and administered by banks or other financial institutions as their trustees. If you are naming a private person as the trustee, he or she may be compensated with a reasonable amount of money.
Additionally, more costs may be incurred if the trustee has to retitle documents or had to transfer ownership to the trust.
2. Drafting is complex
Drafting a Living Trust is difficult and complex. It usually requires the assistance of an Estate Planning Attorney. In the case of Wills, property/asset is directly transferred to designated beneficiaries but Trust may require the disbursement at certain intervals or the trustee is given the discretion to decide when the assets of trusts should be given to the beneficiaries.
After drafting is done, the grantor is required to fund the trust with the assets. This is done by transferring the property/assets in the name of the Trust.
3. Lack of Tax Advantages
Not all Living Trusts provide Tax exemption. A basic Revocable Living Trust does not avoid Estate Taxes. Its main objective is to avoid Probate only. Even an Irrevocable Trust does not exempt a person from taxes completely.
The Federal Estate Tax exemption for the year 2022 ranges from 18%-40% and generally applies to assets over $12.06 million.
In the year 2023, this exemption will be $12.92 million.
Income Tax consequences of Living Trust:
Revocable Living Trust- Income tax is to be paid by the Grantor no matter whether he is the trustee or not.
Irrevocable Living Trust- If Grantor is the trustee, he will be treated as the owner of the assets put into the trust and will be required to pay taxes against those assets as he was doing prior to transferring the assets into the trust.
If any other person is the trustee, the grantor is not required to pay income tax on those assets but the trustee has additional tax reporting requirements.
Gift Tax consequences of Living Trust:
Revocable Living Trust-Grantor is not required to pay gift taxes in revocable trusts but will be taxed as part of the Grantor's Estate.
Irrevocable Living Trust- Grantor will pay gift taxes when assets are transferred into a Trus
NOTE- All these disadvantages cannot be weighed against the advantages which a Living Trust offers. If your primary concern is avoiding probate for your Estate, Living Trusts are the best option for you.
4. Increased contesting period
A trust contest is a type of petition filed in a probate court where the decedent's trust is examined to check whether it should be invalidated.
There may be several reasons for contesting a Trust. For example;
- Beneficiaries are unhappy with the trust’s terms
- Suspicion of fraud and forgery
- Disagreement between beneficiary and trustees
- Trust was made under undue influence or threat.
Depending upon the state where the assets are located, the contesting period may be 120 days from the date of the trust grantor’s death to several years following the grantor’s passing. This increased time means that conflicts can still crop off long after you pass.
Do I need a Living Trust?
Making a Living Trust as part of your Estate Planning provides a hassle-free and simple method for the distribution of assets among the loved ones of a person after death. A Living Trust also allows people to enjoy the benefit from the trust property during their lifetime.
Apart from this, there are many other benefits offered by a Living Trust. These include:
- Avoids Probate
- Protects your privacy
- Protection of Minor Children
- Ensures the Privacy of your Document
- Protects you in case of Illness or Incapacity
Read more about Living Trust and its benefits.
If you are still confused as to what will suit you best as per your needs; you can Estate Planning Attorney on TrulyWill for support and guidance and discuss your requirements.