A living trust is a legal document drawn up to detail how the grantor's assets are to be distributed after death. In contrast to a will where the court seizes control of the estate, in a living trust, the grantor avoids probate and maintains complete control. While a living trust does carry advantages, it also has many disadvantages.
Creating a living trust entails a lot of paperwork, which equates to a high price tag. The grantor must not only pay the higher attorney's costs, but must also pay to have each asset transferred out of the grantor's name and into the name of the living trust. Depending on the size of the estate and the complexity involved, these fees could really add up. In some cases, creating a living trust can end up costing two or three times the cost of setting up a will.
Unlike a will that can be written and put away until needed, a living trust must be continuously monitored. Once the assets are transferred into the living trust, these assets must be monitored on an annual basis to ensure that the living trust's objectives continue to be met. Separate bookkeeping for the living trust is also required to keep the trust's assets separate from the rest of the grantors' personal assets that remain in their names.
Ability to Make Changes
When a living trust is first created, the grantor must decide whether that trust will be revocable or irrevocable. In a revocable living trust, the grantor can make changes to the trust at any given time. However, in an irrevocable living trust, the grantor won't be able to make changes. Choosing the wrong type of trust in the beginning can lead to regret later on. For example, if the grantor accidentally overlooked some assets and failed to place them into an irrevocable living trust, those assets couldn't be added at a later time.
Having a living trust limits the amount of tax opportunities after the grantor's death. Individuals who go through probate, or utilize postmortem tax planning strategies, are usually able to qualify for significant savings through certain tax deductions. However, these deductions are not available for those dealing with a living trust. The only exception to this rule is if the beneficiary of the living trust is a charitable organization. Several tax breaks are offered for living trusts that are going to charity.
- Living Trust Network: FAQs About Revocable Living Trusts
- Michigan State University Extension: Advantages and Disadvantages of a Living Trust
- Ecological Society of America: Planning a Gift to ESA Living Trusts Advantages and Disadvantages
- Barber Emerson, L.C.: Advantages and Disadvantages of a Revocable Trust