Trusts can be a helpful estate planning tool when used correctly. Knowing the consequences of using a trust and when to not use one will help you.
Author: Paul Black
Paul’s experience as the son of two parents with big health challenges is what led him to the work he does today and gives him first-hand knowledge of the challenges that many caregivers and family members face. After graduation from GSU Law, Paul was chosen from dozens of applicants nationwide as one of three 2010-2011 Borchard Foundation Law & Aging Fellows. Paul has been named as a SuperLawyers “Rising Star” in the area of Estate Planning and as a member of Georgia’s “Legal Elite” by Georgia Trend magazine. Published on: August 02, 2022.
Using Trusts in Estate Planning
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A popular option for estate planning is creating a revocable living trust, also known as an inter vivos trust. This type of trust can be revoked or changed at any time.
While you are still alive, you will typically be a ‘trustee’ of the trust. Trustees have control over the assets of the trust. To set up the trust, you need to transfer assets you own to the trust. The trust documents then need to name a successor trustee and beneficiaries.
A successor trustee takes over the management of the trust after you pass away. Beneficiaries are those who will inherit the assets of the trust upon your death.
Creating a living trust is an alternative to creating a will as part of your estate plan. In Georgia, a will must be filed at a probate court to be executed.
Living trusts can be helpful in estate planning, but they also contain some hidden technicalities that can prove disadvantageous.
This article explains some disadvantages you may face when deciding to put up a living trust.
What Are the Disadvantages of a Living Trust?
If you decide to set up a living trust, here are some challenges the trustee and their beneficiaries will have to face.
- Amount of Paperwork
If you are not a fan of paperwork, then brace yourself. Retitling assets is a requirement when creating a trust. For a living trust to be set up correctly, all the paperwork regarding its assets, including any real property, must reflect and show that the trust now owns them.
If you fail to do this, your beneficiaries will have to face lengthy probate hearings when you pass away. In addition, your beneficiaries stand to lose money and time before they can access the assets. So to avoid probate, you will need the correct paperwork to ensure that your assets are in order.
In most instances, you will need assistance from a probate lawyer with extensive legal experience in estate law to help you navigate the complexities of a probate court. Contact the Law Office of Paul Black for a confidential consultation on progressing your probate case.
- High Initial Cost
When you set up a living trust, you may experience a high cost of setting it up. For example, acquiring new deeds and titles may be costly, and this is before the costs of any legal advice.
However, in the long run, this cost is less compared to the cost when the trust beneficiaries face probate court in the distribution of trust assets.
- Beware When Choosing a Trustee or Successor Trustee
Many people make a common mistake by choosing the wrong individual to be a trustee. A trustee is someone or an institution who will manage the trust on your behalf. They also oversee the ultimate distribution of the trust assets.
While it is typical for a person who created the living trust to be a trustee while they’re alive, they still need to a choose successor trustee when they pass away.
Choosing successor trustees that do not have your best interests at heart can lead to mismanagement of trust property and collapse of the trust. Your beneficiaries will receive little or no assets in the trust when you pass away without appointing the right successor trustee.
- Leaving Little or No Assets in the Trust
A trust is only advantageous to your beneficiaries if you put assets in the trust. Note that any asset not put in the trust must go through probate court before your beneficiaries can access them.
So setting up a trust and not funding it will only disadvantage your beneficiaries.
- Mitigating the Disadvantages of Revocable Living Trusts
Many challenges that a revocable living trust result from its technical and complicated nature.
So if you are in Georgia and wish to avoid or adequately handle these disadvantages, you should seek the help of a qualified Georgia estate planning lawyer.
What Should You Not Put in a Living Trust?
While you can transfer most of your assets into a living trust, there are certain assets that you cannot transfer to your living trust. Examples are:
- Retirement accounts used in retirement planning
- Health and medical savings accounts
- Gifts and transfers to minors
- Life insurance
- Financial accounts that you pay bills with and are active
- Motor vehicles
An experienced and qualified estate planning attorney will often provide legal assistance to help you determine which of your assets can go into the trust and which can’t.
What Is a Family Trust?
Another popular trust used in estate planning is a family trust. A family trust is a discretionary trust created to benefit a family for generations. The primary beneficiaries are usually the immediate family or relatives.
Creating and managing family trusts also presents several challenges, such as:
High Tax for Undistributed Income
Income from a family trust that is not distributed to the beneficiaries in the trust is usually taxed at a high tax rate. In addition, when the trust’s grantor dies, the trust is also obligated to file a federal tax return.
It Hinders Family Business Growth
Trustees of family trusts prefer to redirect trust assets and income to the beneficiaries. As a result, the family business usually does not retain profits to reinvest into the business, stunting the growth of a family business.
Consequently, banks and lenders are reluctant to invest in family businesses with such structures.
Liability of the Trustee
A trustee of a family trust is legally obligated to any liabilities the trust may incur. However, it can be risky to this trustee as they will incur a significant personal loss if the trust incurs debts.
Depending on the family circumstances, a family dispute is a common issue in managing family trusts. It usually happens when the trust funds are significant, and there are no clear strategies to distribute the trust income or assets.
Issues can also arise over who controls the family’s trust on behalf of the family. It happens when family members feel their assets in the family trust are mismanaged.
Family disputes may also occur over beneficiary designations and distribution of trust property and assets. In case of death of the grantor or original trustee, they may feel that the successor trustees are not handling the estate with fairness.
Due to their complex nature, family trusts require an experienced professional like an estate planning attorney to help with compliance and keeping legal documents up to date. As a result, family trusts are more expensive to set up, run, and maintain.
What Are the Disadvantages of Putting Your House in a Trust?
In case of a credit default, you stand to lose your house if you put it in a trust because assets in a revocable trust are not immune from lawsuits. Creditors may file a lawsuit against you and initiate proceedings to seize your assets, such as your house.
A spouse divorcing may also initiate a lawsuit to gain control of the house held in a trust if they are not co-trustee to the trust.
To plan and deal with this, you can employ the services of an estate planning lawyer who can provide you with advice on creditor and divorce protection for your assets.