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Making Sense Out of Dollars

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Joel Lerner, Columnist
Posted 6/4/21

Part 6 of 11

What Are The Disadvantages Of The Living Trust?

Although you do not have to go through the costly process of probate, the living trust is not without disadvantages, which include …

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Making Sense Out of Dollars

Trust Me

Posted

Part 6 of 11

What Are The Disadvantages Of The Living Trust?

Although you do not have to go through the costly process of probate, the living trust is not without disadvantages, which include the following:

1. By creating it, you have to place everything you own into the trust, know as “funding the trust.” Any property you own or acquire later must have new deeds drawn up on them. If you hold any assets outside the trust, you may have to go through probate anyway. You can remedy this drawback by plac­ing any “outside assets” into joint ownership with right of survivorship. Bear in mind that jointly held property can duplicate much the same benefits as a living trust since the property will pass outside the courts (probate) and will go directly to the surviving joint owner. A joint savings account is an example.

2. It will almost always cost more to establish a living trust than to write a will. Legal fees can be higher, and assets must actually be transferred to the trust, which can add additional costs. Also, if you appoint another person as trustee, you will have to pay a fee in accordance with state law (unless the trustee waives the fee).

3. The right to, chose your own fiscal year to defer taxes will be lost.

4. The funds in the trust must be used up before the trustor can get special social service benefits (Medicaid, for example).

5. No tax advantage regarding estate taxes is gained by the revocable trust. Nor is there any income tax savings since all income from the trust passes through to the individual’s personal income tax return.

6. You may need to have a simple will regardless of the living trust because you cannot use a trust to name a guardian for your minor children.

7. You will need a will with a “pour-over” clause stating that any property that you forgot to put into your living trust should go there after your death. Those assets will then be subject to probate, but it will not be a lengthy or costly process if your estate is small and if the majority of your assets lie within the confines of the living trust. This extra process may take only a few days to complete. Yet it is crucial to have such a pour-over clause since there most certainly could be assets that you have overlooked while making the living trust.

8. Certain types of assets, such as jewelry and automobiles, are difficult to place in a trust because insurance companies are often reluctant to write a policy for a trust. Also, some assets need not be placed in a trust because they already pass (upon death) to the named beneficiary outside the pro­bate court. These assets could include IRAs, retirement benefits, life insur­ance proceeds, and annuities.

9. Even if you try to cover every eventuality, there are certain circumstances under which a living trust could be rendered inoperative and probate would be required. This situation might arise when:

• Assets are currently subject to litigation (in the event of a lawsuit).

• A tax audit is in progress 

THOUGHT OF THE WEEK

Never leave the one you love for the one you like because in the long run the one you like will leave you for the one they love.

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