Many individuals and families in Texas use trusts as part of their estate plans due to benefits such as minimizing probate costs/paperwork, maintaining the confidentiality of family wealth, and offering tax benefits based on the trust’s structure. However, various kinds of trusts can have disadvantages that individuals and families should consider when including a trust in their estate plan.
Creation and Maintenance Costs
Establishing and operating a trust in an estate plan in Texas involves various financial expenses. For example, initial setup costs can include attorney’s fees for legal assistance in selecting and structuring a trust. Setting up and funding a trust may also involve filing fees, including when grantors real estate or other titled property in a trust.
Trust administration can involve significant costs depending on the complexity of the trust and its assets. For example, you may need to select a professional trustee, like a trust company or financial advisor, to manage the trust. A trustee may incur additional expenses, including legal and accounting fees.
Complexity and Administrative Burdens
Managing a trust can involve significant administrative obligations, especially when a trust holds complex assets like real estate, substantial investment portfolios, or business interests. Trustees have fiduciary duties that require careful attention to detail, including keeping track of investments, expenses, taxes, and distributions to beneficiaries.
Administering a trust can become more challenging when a grantor establishes an irrevocable trust since the law prohibits amending the terms of an irrevocable trust except in limited circumstances. Thus, changes in an irrevocable trust’s needs or goals can create administrative burdens for trustees.
Limited Protection from Creditors or Liabilities
Revocable trusts, which allow grantors to retain the authority to amend or revoke the trust, have the disadvantage of offering limited protection of trust assets from grantors’ or beneficiaries’ creditors or liabilities as the law considers assets in a revocable trust as still belonging to the grantor’s estate for purposes of satisfying creditors or other liabilities. Grantors can obtain asset protection through an irrevocable trust at the expense of losing direct control over the assets they place in the trust.
Potential Tax Consequences
In some situations, trusts can result in higher tax burdens on assets or income generated from assets than if the assets remained in the possession of the individuals who owned them. Thus, grantors should consult tax advisors and legal counsel to understand the potential tax liabilities of creating a trust. Furthermore, transferring assets to a trust can trigger capital gains taxes. Finally, a trust’s structure may lead to estate taxes for a grantor; for example, estate tax laws continue to treat assets placed in revocable trusts as part of a grantor’s estate, which may leave their estate liable for taxes after their death.
Challenges of Funding the Trust
Grantors should also consider the challenges and disadvantages arising from funding a trust. For example, a trust remains ineffective until a grantor funds it. As a result, legal mistakes in transferring assets to the trust may lead to problems with the trust’s validity. Furthermore, some assets may take time and paperwork to transfer ownership from a grantor to the trust, such as real estate, securities/investments, or business ownership interests. Failing to transfer ownership of assets to a trust in a legally valid manner can leave them in the grantor’s estate, subject to probate and estate taxes upon the grantor’s death.
Contact an Estate Planning Lawyer Today
When you consider adding a trust to your estate plan, talk to an attorney from Carroll Law Group, PLLC, about the advantages and disadvantages of trusts in estate planning. Contact our firm today for an initial consultation with a knowledgeable estate planning lawyer to discuss the suitability of various types of trusts for your needs and goals in your estate plan.