Pros and Cons of Trusts

By: Nnamdi Nwaneri (02/2022)

Trust Advantages

I. Avoid Probate Court and its Extras

Probate is the legal process for the orderly distribution of assets and payment of debts when you die. Every individual that passes must go through court administered probate process with the level of court involvement varying. A trust allows you to avoid Probate Court which saves individuals and families:

• Time: a trust agreement and continuously managed trusts shows a presumption of competence for the deceased meaning limited court involvement and a more immediate distribution of deceased assets

• Money: fees for legal, executor or personal representative, inventory, and other costs can accumulate and have to be paid before your assets can be distributed to your beneficiaries

II. Personal And Financial Matters Remain Private

Since there is generally no Probate Court process when you have a Trust, there is no need to make your assets or your personal wishes public. On the other hand, a Last Will and Testament and its contents are made public when they enter Probate Court. Since the Trust forgoes the need for Probate, the contents of the transfer stay private.

III. Asset Control After You Pass Away

Unlike a Last Will and Testament where the deceased controls the ‘how’ in relation to the distribution of assets, with a Trust the deceased controls the ‘how’, ‘when’, and ‘where’ allowing the deceased to protect their family even after they are gone. The control may come in the delay of distributions until children reach a certain age or graduate, establishing mechanisms to ensure money does not fall into the hands of creditors and ex-spouses, or ensuring that special needs children still qualify for benefits.

IV. Preventing Court Appointed Conservatorship

A conservatorship is when a court-appointed representative is given the authority to manage an incapacitated person’s financial matters for them. If you become incapacitated, then a Trust can protect your family from undergoing a conservatorship.

Trust Disadvantages

I. Setting Up a Trust

Setting up a trust is more complex than drafting a straightforward Last Will and Testament. An effective Trust has ownership of all of the property transferred to the Trust via title transfer or beneficiary designation changes. The additional paperwork and record keeping may be the impetus preventing someone from establishing a trust.

II. Maintaining Accurate Records

As the Trust is a separate entity, accurate records, taxes in particular, will need to be maintained to ensure proper administration. This is not difficult, but it is easy to forget and continue if it has been a few years since the Trust has been created.

III. Tax Considerations

A trust is a separate legal and taxable entity. Whether the trust pays its own taxes depends on whether the trust is a simple trust, a complex trust, or a grantor trust. Simple trusts and complex trusts pay their own income taxes. Grantor trusts do not pay their own taxes as the grantor of the trust pays the taxes on a grantor trust’s income. A tax benefit may or may not be advantageous for the individual creating the trust.

Conclusion

Laws regarding Trusts differ by state therefore an understanding of the requirements in creating a trust in your state is critical. All of the disadvantages listed above can be nullified with proper Trust planning and/or other estate planning documents. Do not allow the potential pitfalls discourage you from having your final wishes adhered to upon your passing.