What Are the Disadvantages of a Trust?
Trusts are an extremely popular option for California homeowners looking to avoid the time, cost, and publicity of a probate proceeding. But as useful as trusts can be, they have both pros and cons like everything in life. A trust may not always be the best estate planning option for everyone. What are the disadvantages of a trust? In this blog post, we’ll share a few potential drawbacks to creating a trust.
Potential Disadvantage #1: Cost
The cost of a trust can be intimidating for some. In California, the cost of establishing a trust may range from $2,000 to 5,000 or more, depending on the attorney’s location and experience and the complexity of the creator’s estate and wishes.
There will also be additional costs such as county recording fees for any deeds to transfer real property to the trust name. Recording fees are set by the county recorder where the real property is located.
After the trust settlor passes away, keep in mind that there will also be additional trust administration costs. Typically, this ranges from $5,000-10,000 or more, depending on the complexity of the estate and the level of attorney involvement the successor trustee desires. The successor trustee is also entitled to compensation for their time.
Yet even with these costs, the overall cost is often cheaper for creating and administering a trust than to go through the probate process. Attorney fees and executor fees are determined by California Probate Code §10800 and 10810 and are based on the gross value of the estate:
- 4% on the first $100,000
- 3% on the next $100,000
- 2% on the next $800,000
- 1% on the next $9,000,000
- 0.5% on the next $15,000,000
- For all amounts above $25,000,000, the court will determine a reasonable compensation amount.
Very small estates, such as California residents who don’t own any real estate or significantly valuable assets, would not need to go through the Probate Court after death. For these individuals, a will-based estate plan may be more appropriate.
Potential Disadvantage #2: Record Keeping
Besides cost, trusts also require some level of organization when it comes to record-keeping. A trustee must maintain detailed records of property transferred into and out of a trust. This helps ensure that all of your assets are appropriately transferred into your trust.
This is especially important after death when successor trustees must be fastidious about keeping records of all of their actions. This is why it’s important to select a successor trustee who is detail-oriented and organized, or a professional fiduciary who can properly handle the record-keeping for your trust.
Potential Disadvantage #3: Borrowing Complications
Another potential challenge with a trust is encountering complications when borrowing. For example, many of our clients discover that their home must be taken out of their living trust before it can be refinanced. Then, after the refinance is complete, they must make sure that the refinance company transfers the home back into the trust.
If this doesn’t happen, you risk leaving the home outside of the trust and triggering a probate after your passing. Having a trust adds an extra step of complexity to borrowing situations like a refinance, but if all steps are properly followed, it shouldn’t be a problem.
Potential Disadvantage #4: Lack of Creditor Protection
The next drawback of a revocable living trust is the lack of asset protection against creditors. While irrevocable trusts may provide creditor protection, revocable trusts do not. You cannot avoid creditors by simply transferring assets into a revocable living trust.
Even after your passing, creditors may still have a right to collect on your outstanding debts. Your successor trustee would be responsible for informing creditors of your passing, negotiating any debts with them, and paying them off before trust assets are distributed to beneficiaries.
Potential Disadvantage #5: Potential Tax Burdens
Finally, trusts can carry potential tax burdens. Trusts may be subject to a higher income tax rate than individual taxpayers in certain scenarios. If the trust has a gain or income of over $15,450, then the tax rate is in the highest bracket. This may be higher than a personal income tax rate and without proper planning, there may be an unintended tax consequence.
Working with a qualified tax professional and estate planning attorney can help avoid any adverse tax implications.
Seek Legal Counsel
If you’re wondering whether a trust is right for you, and which trust might work best, consult an experienced trust attorney. They can guide you through all of the available options and help you choose the best plan for your circumstances.
If you have any questions about the potential disadvantages of a trust, or finding the optimal type of estate plan for you, feel free to contact our law firm.
Law Offices of Daniel A. Hunt
The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10,000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.