May 23, 2024

Disadvantages of Revocable Living Trusts: What You Need to Know

Revocable living trusts have become a popular estate planning tool in recent years. While they offer some advantages, revocable living trusts also come with some key disadvantages that you should understand before deciding if this type of trust is right for your situation. 

This comprehensive guide examines the cons of revocable living trusts to help you make an informed decision.

A revocable living trust allows you to place assets like your home, bank accounts, investments, and other property into a trust you control during your lifetime. The terms of the trust spell out how those assets will pass on to your beneficiaries when you die or if you become incapacitated. 

Unlike an irrevocable trust, you maintain control of the assets in a revocable trust and can make changes or even terminate the trust at any time.

So, what are the potential disadvantages or cons of using a revocable living trust? Here are some key things to consider:

What Exactly is a Revocable Living Trust?

A living trust is an estate planning document and arrangement that allows you to place assets into a trust during your lifetime. The individual who establishes the trust is known as the grantor or trustor. When you create a revocable living trust, you name yourself as the trustee, meaning you maintain full control over the assets in the trust.

The key feature of a revocable living trust is that it can be changed, amended, or terminated at any time by the grantor. You can alter the terms of the trust, remove assets from it, or even dissolve the trust completely if you wish.

A revocable living trust becomes unchangeable (irrevocable) upon your demise. At that point, the successor trustee you named will distribute the trust assets directly to your named beneficiaries without going through probate.

What Are Some Disadvantages of Revocable Living Trust?

While revocable living trusts offer many benefits, there are some potential disadvantages to consider as well:

Costs to Set Up and Maintain

Drafting a customized revocable living trust document can cost $1,000-$2,000 in attorney’s fees. There are also costs to properly fund the trust by retitling assets like bank accounts and real estate into the name of the trust. Ongoing trust administration fees may apply, too.

No Asset Protection from Creditors

Assets held within a revocable living trust are still regarded as your personal property. This means they are not protected from potential creditors. An irrevocable trust can shield assets from creditors.

No Tax Benefits

Revocable trusts do not provide income or estate tax advantages. You must still report income from trust assets on your personal income tax return. The assets also remain in your taxable estate. An irrevocable trust can potentially reduce estate taxes.

Require Proper Maintenance

A revocable living trust requires more complex administration than simply having a will. You must keep assets properly retitled in the trust and comply with all trust terms and local laws. If the trust is not funded and maintained properly, it may not achieve your intended goals.

Does Not Avoid Probate Entirely

While assets in a revocable living trust avoid probate, any assets still in your individual name at death will go through probate. You must ensure that nearly all major assets are transferred into the trust to avoid probate.

May Still Need a Will

It’s generally advised to have a “pour-over will” along with a living trust. This will states that any assets not placed into the trust during your lifetime will get transferred to the trust upon your death. Without an accompanying will, any assets left out of the trust may not go where you intended.

Is a Living Trust Right for You?

A revocable living trust can provide valuable benefits like avoiding probate and enabling easier asset management if you become incapacitated. However, living trusts are not necessary for everyone.

Consider your overall estate plan goals, as well as the size and type of assets you own. An estate planning attorney can help evaluate your situation and determine if a living trust paired with a will makes sense or if a will alone would suffice. Consult with the team at The Titus Law Firm to find out which tool makes the most sense for you.

Alternatives to a Revocable Living Trust

If you want to avoid probate, but the downsides of a revocable living trust do not appeal to you, here are a few other options to consider:

Joint Tenancy Ownership

Registering certain assets like bank accounts and real estate with a joint owner provides a way to avoid probate for that asset when the first owner passes. The asset automatically transfers to the surviving joint owner. However, there are other downsides to joint tenancy ownership to consider.

Payable on Death Designations

Bank accounts, retirement accounts, stocks, and some other assets can be titled with a payable-on-death beneficiary. This automatically transfers the asset to the named beneficiary at your death without needing probate. But it doesn’t offer control like a trust does.

Outright Asset Gifting

You can also consider gradually gifting assets during your lifetime to intended heirs. Lifetime gifts are not subject to estate taxes. However, this approach requires giving up control of the assets.

Do Revocable Trusts Limit Flexibility for Heirs?

Any distributions made from a revocable living trust must adhere to the terms and directives specified in the trust document. Once assets are transferred into the trust, your heirs no longer have control over those assets or how they are distributed.

The rigid rules of the trust limit flexibility compared to inheriting assets directly. Your heirs may be forced to follow distribution instructions they do not necessarily agree with.

Is Ongoing Trust Administration Required?

Transferring assets into a revocable trust is just the first step. Ongoing administration is required to keep the trust operative. That includes tasks like maintaining trust records, filing taxes, processing transactions within the trust, communicating with beneficiaries, and distributing assets if the grantor passes away or becomes incapacitated.

If the administrative obligations are not upheld properly, the trust risks failing and assets falling into probate. Ongoing trust administration requires time and diligence.

Talk to an Attorney About Your Options

The best estate plan for your goals and assets depends on your unique situation. Consult an estate planning attorney at The Titus Law Firm in Houston to discuss whether a revocable living trust appropriately balances the advantages and disadvantages of your needs compared to other estate planning tools. They can explain your options clearly and help craft an optimal plan.