Advantages And Disadvantages Of A Trust
A Living Trust, is one of the best, simplest, and most commonly used methods for passing assets to your loved ones after you’re gone (and avoiding financial disasters).
In this article, we will explain the numerous advantages of Living Trusts and explain some of the disadvantages of a Trust you should take into consideration when deciding which Estate Planning option is right for you and your family.
Advantages Of A Living Trust
1. Avoid Probate Court
Generally, the disadvantages of a Trust are outweighed significantly by the many advantages created by having a Living Trust in place. The biggest advantage of a Living Trust is that, unlike a Last Will and Testament, a Trust allows you to avoid Probate Court. There are three main reasons why this is important.
First, Probate can be very expensive.
Probate is the legal process through which the court ensures that, when you die, your debts are paid and your assets are distributed according to Michigan law. Legal fees, personal representative or executor fees, inventory fees (county taxes), and other costs have to be paid before your assets can be fully distributed to your heirs or beneficiaries.
If you own property in other states, your family could face multiple Probates, each one according to the laws in that state. These costs can vary widely, but we’ve had clients who had to pay tens of thousands of dollars throughout the Probate process. In general, Probate is often much more expensive than doing some simple Estate Planning in advance.
Second, Probate can take a long time.
In Michigan, the standard probate process takes a minimum of 5 months to complete. However, over the past decade we’ve seen that it generally takes 9 months to a year to resolve simpler cases (and several years for contested cases). We once represented a client whose Probate lasted for 8 years!
Third, Probate is public.
Your family has no privacy. Probate is a public process, so anyone can see the size of your estate (sometimes what you actually owned), who you owed debts to, who will receive your assets, and when they will receive them. The process invites upset heirs to contest your Will and can expose your family to greedy creditors and potential fraudsters.
2. Your Personal And Financial Matters Remain Private
Since the Trust forgoes the need for Probate, the contents of the transfer stay private. Additionally, most transfers take place in our office within weeks.
3. You Maintain Control Of Your Finances After You Pass Away
With a Living Trust, you can continue to protect your family, even after you’re gone: delay distributions until children reach a certain age or graduate; make sure money doesn’t fall into the hands of creditors and ex-spouses; & make sure that special needs children still qualify for benefits.
Many people are unaware that you do not have to distribute your entire estate immediately after death. Using a Living Trust, you can hold off on distributions until your children reach a certain age, or achieve a milestone (i.e. graduation from college, marriage etc.). A Trust can also be used to ensure that your children don’t lose their inheritance due to substance abuse, creditor problems, or divorce.
As an example, we once represented a client who was in charge of managing his father’s Trust. The client’s sister was the beneficiary, and as luck would have it, was awful with money. Her creditors were breathing down her neck, and she needed to declare bankruptcy. The inheritance would have been devoured by the creditors or swept into her bankruptcy filing had the Estate Plan forced us to make distributions immediately.
Instead, the Trust allowed us to wait until after the sister had discharged her debts in the bankruptcy court and then make the payment. She ended up with roughly $800,000 more than she would otherwise have received!
In a more drastic example, we once handled a case where a father was in an accident with his two sons. The father was killed instantly. The youngest son suffered severe handicaps. Half of the father’s property went to the youngest son disqualifying him from desperately needed medical benefits. The remainder of the property went to the older son who was not ready for the responsibility and dropped out of school. Sadly, this could have easily been prevented with a Living Trust.
For this reason, it is particularly important to have a properly drafted Trust when you have young children who may face unpredictable (and unknowable) challenges as they grow up.
4. Reduce The Possibility Of A Court Challenge
When analyzing a Will or a Trust, it’s important to understand that a Living Trust is often more difficult to challenge in court than a Will because it is harder to prove incompetence. In order to successfully undermine a Trust, the individual challenging has to prove that the documentation is invalid in some way, or that you were improperly influenced by a third party. A Trust is actively managed by you during your life, not a single event situation like that of a Last Will and Testament. If you were able to facilitate the transfer and management of assets during your life, then it is tough to substantiate claims of incompetence.
Additionally, only beneficiaries named in the Trust are entitled to notice and the right to see its contents. A Will on the other hand must be provided both to all of your named beneficiaries and your heirs at law. Thus, if you disinherit an heir in a Trust, it’s less likely that they will know to contest the document.
Unless you have reason to suspect that family members will be unhappy, an attack on a Trust is unlikely. Indicators of a potential conflict that could result in legal repercussions include: you don’t want to leave any property to your closest relatives, your relatives are aware that you have had a mental illness in the past, you are in a relationship that your relatives disapprove of, or if you remarried and you have children that dislike your spouse. If any of these are concerns present, consult an attorney on ways to plan for and prevent these disagreements.
5. Prevent A Conservatorship
If you become incapacitated, then a Living Trust can protect your family from undergoing a conservatorship. A conservatorship is when a court-appointed representative is given the authority to manage an incapacitated person’s financial matters for them. This feature of a Trust is especially comforting to families in times of difficulty since they do not have to worry about going to court and requesting access to the incapacitated person’s finances. A Trust gives the family one less problem to face when someone becomes sick.
If the Trust is set up as an individual Trust, then the Successor Trustee can take over and manage the assets. If the Trust is owned by a married couple, then the second spouse will step in as the acting Trustee. It is also prudent to have a Durable Power of Attorney for Finances in addition to a Living Trust to grant the new acting Trustee the power to manage any property and finances outside of the Trust.
Disadvantages Of A Trust
While a Living Trust is often the best and most comprehensive ways to protect your family and assets, it does have some additional complexities. Most of the advantages of a Living Trust significantly outweigh any disadvantages, but you should still be aware of them when analyzing your Estate Planning options.
1. Additional Paperwork
One of the disadvantages of a Trust is the additional paperwork. In order to make a Living Trust effective, you need to make sure that the ownership of all the property in the Trust is legally transferred to you as the Trustee. If an asset has a title (real estate, stocks, mutual funds), you need to change the title to show that the property is now owned by the Trust. Let’s say you want to put your house into the Trust. To do this you need to prepare and sign a new deed to transfer ownership to you as trustee of the Trust. In the end, a little bit of additional paperwork and record keeping is worth much more than the time and money that will be lost in Probate, not to mention the stress that your family will have to go through to access your assets after you pass.
2. Maintain Accurate Records
Once you create a Living Trust you generally don’t need separate income tax records if you are both the Grantor and the Trustee. Any income you receive from property that you are holding in the Trust will simply be reported on your personal tax returns. However, if you transfer property in or out of the Trust, you need to keep accurate written records. This isn’t difficult, but it’s easy to forget if it has been a few years since you created your Trust.
For many families, the disadvantages of a Trust are far outweighed by the advantages, which is why it is one of the best, simplest, and most commonly used methods for avoiding financial disaster and passing assets to your loved ones after you’re gone.
How Do I Set Up A Living Trust?
If you’d like to set up a Living Trust, or you have additional questions about your unique situation, we can help.
Over the past decade, we’ve helped 1,000s of clients set up all manners of Living Trusts, Wills, Powers of Attorney, and Estate Plans.
We’d be happy to answer any questions you have about Living Trusts.
Just give us a call at (248) 613-0007 to schedule your complimentary consultation.
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Written By Chris Atallah - Founder, Rochester Law Center, PLLC
Written By Chris Atallah - Founder, Rochester Law Center, PLLC
Chris Atallah is a licensed Michigan Attorney and the author of “The Ultimate Guide to Wills & Trusts – Estate Planning for Michigan Families”. Over that past decade, Chris has helped 1,000s of Michigan families and businesses secure their futures in all matters of Wills, Trusts, and Estate Planning. He has taught dozens of seminars across the State of Michigan on such topics as avoiding the death tax, protecting minor children after the parents’ death, and preserving family wealth from the courts and accidental disinheritance. If you have any questions, Chris would be happy to answer them for you – just call at 248-613-0007.