The Disadvantages of a Living Trust - A Lawyer"s Confession
At the many trust seminars I have held over the years, I have often heard the question, "What are the disadvantages of a Living Trust?" My answer has always been "They are so few and so minor that they should not be considerations in your decision regarding establishing a trust.
" That statement is true to the extent that the disadvantages are minor, but I don't want to mislead you.
There are a few distinct disadvantages that you may want to consider.
1.
Initial funding of your trust can be a real pain.
The larger and more complex your Living Trust estate is, the more of a pain it will be.
In order for your Living Trust to be effective, all assets must be transferred to the trust.
This can be time consuming drudgery.
All real property must be transferred.
This means a separate deed for each property must be prepared.
Many counties/states have recording forms that must be prepared and then the deed and forms must be recorded at your county recorder's office.
You must prepare the deeds and forms yourself or pay somebody to do them for you.
This also means trips to the recorder and waiting in lines.
All bank accounts, stocks, bonds, mutual funds, and other investments with documents of title must be transferred.
This means visiting each bank, broker or other financial professional.
Valuable items of property such as boats, autos, motor homes and maybe firearms must have title changed.
This means more documents of title must be filed or recorded and more standing in line will occur.
You will also want to make your Living Trust your secondary IRA, annuity, 401K, and insurance beneficiary.
This means more work.
Of course, this does not all have to be done immediately, but if something happens to you before it is complete, you risk probate.
Once you have finished, this task becomes much easier as you will thereafter acquire all new assets in the name of your Trust making changes unnecessary.
Still, this initial process can be frustrating.
2.
Writing a check can be difficult.
Every time you write a check at the grocery store, department store, or other venue, you may find yourself trying to explain to the clerk that you are the trustee of your Living Trust and that your ID is sufficient to verify the check.
Trusts have become more common and more clerks are aware of them, but there is still a large part of society that is clueless about Living Trusts and these folks can make life difficult.
For that reason, I usually recommend that you do not keep large sums in your personal checking account, so that it remains in your name or names, thus avoiding the awkward explaining in the checkout line, while not risking probate.
3.
Refinancing real estate can be difficult.
Most banks or mortgage companies will require that your real estate is not in a Living Trust while they are financing and then recording their financial interest in the property.
This means taking the property out of your Trust during the financing and then returning it to your Trust when the transaction is complete and recorded.
This can be very time consuming.
4.
You must always remember that you have a trust when purchasing anything new and the people you deal with may be ignorant about trusts.
When you buy that new car, you want to take title in your name(s) as trustee of your trust.
It is easy to forget to do that, especially when your trust is new and you aren't used to it.
You can run into a car salesperson that does not understand trusts.
You may run into bankers who don't know the difference between revocable and irrevocable trusts and they may insist that you need a separate Federal tax ID for your trust.
Is this a major drawback? No, it's not, but it can be awkward, time consuming and a little frustrating.
(In case you are wondering, an irrevocable trust is used for other purposes such as asset protection, charitable gifts or tax avoidance purposes.
They are separate entities and need tax ID numbers.
Once property is in them, it cannot be removed.
Your Living Trust will be a joint revocable living trust and is an extension of both of you (if a couple), not requiring a separate tax ID.
) 5.
Perhaps the biggest drawback to a Living Trust is also one of its greatest benefits.
After your death, there will be no probate.
Everything is done quickly and quietly without lawyers or courts.
The benefits of this are obvious, but what is the drawback? The drawback is that there is no one to supervise this distribution.
There is no one looking over the shoulder of your successor trustee to be sure they act properly.
In other words, you must trust your trustee.
This is why it is called a trust.
It is not difficult for a successor trustee to deceive other beneficiaries or mishandle assets.
There is no judge to review the records and accounting.
There is a solution if you have any reservations or doubts about your successor trustee.
You can name co-trustees to watch each other, if you can trust them not to co-conspire.
However, you then run the risk that they may not agree on issue about distribution and that can lead to the courts to resolve disputes, just what you are trying to avoid.
You can name 3 trustees so that you always have a majority, but 3 or more can become cumbersome.
You can name professional trustees or banks to act as your successor trustee, and they are typically licensed and bonded and will do as directed, but they will be expensive.
In conclusion, despite all these drawbacks, for nearly everyone, a Living Trust is still the best available estate plan.
In virtually every case, the benefits of a Living Trust far outweigh the disadvantages.
For example, there are no disadvantages to a Living trust regarding income taxes or estate taxes.
A Living Trust is still the best way to avoid probate which is enough reason to tolerate the difficulties.
I have written extensively on the benefits elsewhere, and they are many and they are valuable.
I just do not want to be accused of sugar coating the few disadvantages.
I want my clients to set up their trust with their eyes wide open.
The information in this article is provided for educational purposes only.
It is not and should not be considered legal advice.
For your personal applications of this data, you should consult a local attorney familiar with your local requirements.
" That statement is true to the extent that the disadvantages are minor, but I don't want to mislead you.
There are a few distinct disadvantages that you may want to consider.
1.
Initial funding of your trust can be a real pain.
The larger and more complex your Living Trust estate is, the more of a pain it will be.
In order for your Living Trust to be effective, all assets must be transferred to the trust.
This can be time consuming drudgery.
All real property must be transferred.
This means a separate deed for each property must be prepared.
Many counties/states have recording forms that must be prepared and then the deed and forms must be recorded at your county recorder's office.
You must prepare the deeds and forms yourself or pay somebody to do them for you.
This also means trips to the recorder and waiting in lines.
All bank accounts, stocks, bonds, mutual funds, and other investments with documents of title must be transferred.
This means visiting each bank, broker or other financial professional.
Valuable items of property such as boats, autos, motor homes and maybe firearms must have title changed.
This means more documents of title must be filed or recorded and more standing in line will occur.
You will also want to make your Living Trust your secondary IRA, annuity, 401K, and insurance beneficiary.
This means more work.
Of course, this does not all have to be done immediately, but if something happens to you before it is complete, you risk probate.
Once you have finished, this task becomes much easier as you will thereafter acquire all new assets in the name of your Trust making changes unnecessary.
Still, this initial process can be frustrating.
2.
Writing a check can be difficult.
Every time you write a check at the grocery store, department store, or other venue, you may find yourself trying to explain to the clerk that you are the trustee of your Living Trust and that your ID is sufficient to verify the check.
Trusts have become more common and more clerks are aware of them, but there is still a large part of society that is clueless about Living Trusts and these folks can make life difficult.
For that reason, I usually recommend that you do not keep large sums in your personal checking account, so that it remains in your name or names, thus avoiding the awkward explaining in the checkout line, while not risking probate.
3.
Refinancing real estate can be difficult.
Most banks or mortgage companies will require that your real estate is not in a Living Trust while they are financing and then recording their financial interest in the property.
This means taking the property out of your Trust during the financing and then returning it to your Trust when the transaction is complete and recorded.
This can be very time consuming.
4.
You must always remember that you have a trust when purchasing anything new and the people you deal with may be ignorant about trusts.
When you buy that new car, you want to take title in your name(s) as trustee of your trust.
It is easy to forget to do that, especially when your trust is new and you aren't used to it.
You can run into a car salesperson that does not understand trusts.
You may run into bankers who don't know the difference between revocable and irrevocable trusts and they may insist that you need a separate Federal tax ID for your trust.
Is this a major drawback? No, it's not, but it can be awkward, time consuming and a little frustrating.
(In case you are wondering, an irrevocable trust is used for other purposes such as asset protection, charitable gifts or tax avoidance purposes.
They are separate entities and need tax ID numbers.
Once property is in them, it cannot be removed.
Your Living Trust will be a joint revocable living trust and is an extension of both of you (if a couple), not requiring a separate tax ID.
) 5.
Perhaps the biggest drawback to a Living Trust is also one of its greatest benefits.
After your death, there will be no probate.
Everything is done quickly and quietly without lawyers or courts.
The benefits of this are obvious, but what is the drawback? The drawback is that there is no one to supervise this distribution.
There is no one looking over the shoulder of your successor trustee to be sure they act properly.
In other words, you must trust your trustee.
This is why it is called a trust.
It is not difficult for a successor trustee to deceive other beneficiaries or mishandle assets.
There is no judge to review the records and accounting.
There is a solution if you have any reservations or doubts about your successor trustee.
You can name co-trustees to watch each other, if you can trust them not to co-conspire.
However, you then run the risk that they may not agree on issue about distribution and that can lead to the courts to resolve disputes, just what you are trying to avoid.
You can name 3 trustees so that you always have a majority, but 3 or more can become cumbersome.
You can name professional trustees or banks to act as your successor trustee, and they are typically licensed and bonded and will do as directed, but they will be expensive.
In conclusion, despite all these drawbacks, for nearly everyone, a Living Trust is still the best available estate plan.
In virtually every case, the benefits of a Living Trust far outweigh the disadvantages.
For example, there are no disadvantages to a Living trust regarding income taxes or estate taxes.
A Living Trust is still the best way to avoid probate which is enough reason to tolerate the difficulties.
I have written extensively on the benefits elsewhere, and they are many and they are valuable.
I just do not want to be accused of sugar coating the few disadvantages.
I want my clients to set up their trust with their eyes wide open.
The information in this article is provided for educational purposes only.
It is not and should not be considered legal advice.
For your personal applications of this data, you should consult a local attorney familiar with your local requirements.
