The Advantages & Disadvantages of a Trust

A trust is a legal arrangement in which you transfer control of your property to a trustee who is responsible for managing your financial affairs. Unlike a will, a trust is used to direct the distribution of your assets while you're still alive. Living trusts offer several unique advantages over a traditional will, particularly if you have a large estate, minor children or are concerned about who will manage your affairs should you become incapacitated.

The primary advantage of establishing a trust is that it allows the executors your estate to avoid the probate process after your death. Typically, the state will appoint an executor to oversee the disposition of your assets if you have not named an executor in your will. The executor will the value of your assets, pay any debts owed by your estate and distribute your property to your heirs. If you die without a will or your will is contested, probate can drag on for months or years, resulting in substantial legal fees. By transferring your property into a trust, you exclude it from the probate process, making it much easier for your beneficiaries to receive their share in your estate.

A living trust also protects your interests and the interests of your beneficiaries in certain situations. For example, if you become permanently incapacitated due to an accident or illness, or your mental ability is impaired by advancing age, a living trust safeguards your family and ensures that your affairs will continue to be managed according to your wishes. The trustee who manages the trust can ensure that your bills are paid, make provisions for your long-term care and ensure that your family receives the proper financial support. This eliminates the need for a state-appointed guardian or conservator, who may not be aware of your specific wishes regarding your assets or property.

One of the primary disadvantages of establishing a trust is the cost. Depending on the size of your estate, a trust can cost hundreds or thousands of dollars to set up. In addition, you may have to pay the trustee a fee for performing his duties. A trust must be continually maintained and updated to ensure that all of your assets are properly included, which can result in ongoing legal fees. Contrary to popular belief, placing your property in a trust does not necessarily offer any savings on estate or inheritance taxes.

A trust is also limited in terms of the protection it offers from creditors. If a creditor pursues a claim against you during your lifetime, transferring assets to a trust will not protect them if a judgment is entered against you. As long as you retain rights to property held in trust, creditors may have access to it. A trust also does not make provisions for any property that is not transferred into it. This means you will still need to draft a will to account for the distribution of these assets.