9 Important Disadvantages Of A Trust

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Disadvantages Of A Trust - Disadvantages Of Revocable Living Trusts - Irrevocable Trust Disadvantages

There are numerous disadvantages of a trust. 

But they do not outweigh the benefits of putting your assets into a trust. 

In this article, you’ll learn about:

  • which assets can go into a trust
  • how creditors can attack your trust
  • how you lose personal ownership of the property
  • how you can lose money to taxes
     

Let’s dig into the disadvantages of a trust. 

Having your estate plan set up incorrectly means that your heirs could lose money to taxes, creditors, litigation, and contested documents

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Disadvantages Of A Trust

These sections are going to teach you about the 9 disadvantages of a trust. 

And what you need to do to successfully avoid most of them. 

Fill out the form on this page to get a reliable trust built for your family. 

No Income Tax Savings

One of the disadvantages of a trust is that there are no income tax savings. 

The assets will no longer be in your name when they are in the trust. 

But you will still be responsible for paying the taxes on those assets. 

The assets will be titled in the name of the trust. 

And you are required to report this income on your individual income tax returns. 

Income taxes for a trust are different when you’re alive and when you’ve passed away. 

When You're Alive

While you’re alive, the trust does not need its own Tax Identification Number. 

This is because you will file the trust’s income on your tax returns. 

So there is no separate Tax ID needed. 

This may not be on your list of disadvantages of a trust. 

Especially if there is real estate is held in the trust that you get to write off. 

After You're Dead

After you’ve passed, the trust will need a Tax Identification Number. 

To get this, the trustee will need to file Form SS-4

This is the application for the Employer Identification Number (EIN) the IRS needs.

All income that the trust earns gets reported under this EIN. 

To report income, the trust will file a Form 1041

This shows how much of the income the trust earned was paid to the trust beneficiaries.

The trust does not pay income tax on income that gets distributed to the trust beneficiaries.

The beneficiaries pay income tax on the income they receive from the trust.

If the trust does not distribute all of its income, it must pay income tax on the undistributed income.

The next disadvantages of a trust is that there are no estate tax savings. 

Related: How Long Do You Have To Probate A Will?

No Estate Tax Savings

A trust does not eliminate federal or estate taxes. 

But a trust can get structured in a way to minimize the estate taxes you’ll owe.

 An estate that does not exceed the estate tax exemption amount won’t owe federal taxes. 

But you may still owe state estate taxes

This is because many states impose their own estate or inheritance taxes. 

So, most likely, you will owe state taxes on your estate. 

Even if you owe $0 in federal estate taxes. 

Related: What To Do About An Executor Not Communicating With Beneficiaries

No Time Limit To Creditor's Claims

These are disadvantages of a trust compared to a will

When a will gets probated, there is a deadline for creditors to make claims. 

Creditors are required to present their claim to the executor of an estate by a deadline.

Each state’s statute for the creditor deadline is different. 

They range from 3-12 months. 

After this time period, the creditors lose their right to pursue the estate. 

And they can no longer sue the estate to collect assets that they are owed. 

But one of the disadvantages of a trust is that it’s not subject to the same statutes. 

A creditor can sue the trust or its beneficiaries for amounts due long after you have died.

This is true even after:

  • the trust has terminated
  • all of the trust assets are distributed to the beneficiaries 
     

Creditors can still sue the beneficiaries for claims against the decedent. 

Another disadvantages of a trust is that it does not protect you from creditors while you’re alive. 

Related: What If The Executor Does Not Probate The Will

Does Not Avoid Creditor Claims During Your Life

A lot of people place their assets into a trust for protection. 

But there’s a disadvantage to a trust with creditor claims

A trust does not prevent creditors from suing you or suing your trust to collect debts.

This is because, while you’re alive, you have maintained control over the assets. 

And the courts will treat you as the owner of the assets in the trust. 

They can force you to pay the trust’s assets to your creditors. 

Related: Penalty For Stealing From An Estate

Not All Assets Can Go Into A Trust

You might want a trust to protect your assets or set up rules for your estate. 

But one of the disadvantages of a trust is that not all assets can go into a trust. 

Assets that cannot go into a trust include:

Related: Consequences Of Not Probating A Will

Difficulties Refinancing Properties In Trust

Another disadvantages of a trust is when you’re trying to refinance property in a trust. 

When you go to refinance property in a trust, your lender may not allow it. 

For residential real estate, the lender may make you transfer the property to your name. 

The reason is that they are afraid that they won’t be able to foreclose. 

They want to make sure they are protected in the event that you can’t make payments. 

But this is different if you are the trustee of the trust. 

When a trustee refinances a property in a trust, the lender has the right to foreclose. 

Just know that you may have to speak to several lenders before you find the right one.

Loss Of Personal Ownership

Potentially big disadvantages of a trust are the loss of personal ownership. 

When you place your assets into a trust, you no longer personally own them. 

After you transfer property into a trust, the trustees are in control of the assets. 

But this doesn’t mean that you lose full control. 

You can have the power to appoint and remove trustees. 

You can even be a trustee yourself. 

But the assets your place into a trust are no longer owned by you. 

The assets are now owned by the trust. 

And if you treat the assets as your own, the trust can get contested. 

Does Not Eliminate The Need For A Will

A trust does not eliminate your need for a will. 

You still need a will to accomplish things like:

  • naming a guardian of your children
  • appointing an executor for your estate
  • distributing non-trust assets to heirs
     

If you die with a trust and no will, your estate gets split up per intestacy laws.

But this is only your assets that are not in the trust. 

 Related: What Happens If No Probate Is Filed?

Paperwork And Records

One of the more annoying disadvantages of a trust is the amount of paperwork that you have to do. 

The ownership of all property needs to get legally transferred to the trustee.

You need to change the title to show the assets are now owned by the trust. 

This includes assets like:

  • real estate
  • stocks
  • brokerage accounts
  • mutual funds
  • cryptocurrency wallets
     

Let’s say you want to transfer real estate into a trust. 

You need a quitclaim deed to put your house into the trust.  

This will transfer ownership from you to the trust. 

And you’ll also need to create a power of attorney in case you become incapacitated. 

The only records that you need to keep are any transfers of ownership. 

For taxes, you’ll file the assets on your personal tax returns as mentioned above. 

So, there is no additional tax paperwork that you need to do. 

Related: What An Executor Cannot Do

Avoid The Disadvantages Of A Trust

If you want the estate planning attorneys to set up your estate plan, fill out the form below.

We have the experience needed to ensure that your assets are protected.

And passed down with minimal tax penalties.

This means that your heirs don’t wrongfully lose money to creditors and taxes.

After you fill out the form below, we will set up your free consultation.

Talk soon.

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