In California, setting up a trust can make sense in estate planning, but it’s essential to understand the drawbacks before making a final decision. Knowing some of the downsides of trusts can help you make informed decisions about whether a trust makes sense for your financial planning. Following are some of the main disadvantages of trust for you to consider.
Setup and administration
Setting up and maintaining a trust can become costly, with attorney fees, trustee fees and administrative costs. Some of these ongoing fees reduce the amount of assets available for the beneficiaries.
Managing a trust also involves legal complexity and documentation. Many types of trusts exist; some may require understanding intricate laws and ongoing legal help. Trusts can also require meticulous, detailed record-keeping and may have certain legal rules that make it difficult to manage.
Protection and liquidity
Certain types of trusts protect your assets from creditors, lawsuits and divorce, but not all do. You typically need to set up an irrevocable trust to receive these protections. However, once assets transfer into an irrevocable trust, the trust owns them, and the person who created the trust cannot take them out, even if they suffer a financial crisis and need to liquidate their assets. Other trusts allow you some control over the assets once transferred but may still not be readily liquid in an emergency.
Taxes and disputes
Depending on your type of trust, the tax consequences of placing your assets in a trust may exceed your personal tax liability. Understanding and planning for the tax implications when setting up the trust is essential. Once the trust grantor dies, the beneficiaries may struggle with understanding how to properly manage assets within the trust, especially if they produce an ongoing income stream, such as stocks or a real estate portfolio. This situation can lead to conflicts or disputes about managing the trust.
While trusts are an essential estate planning tool, they come with their share of disadvantages. It’s necessary to weigh these against your personal needs and preferences to make the best decision for your financial goals and circumstances.