Disadvantages of Living Trusts
Living trusts are potentially very useful, valuable tools in a variety of situations. They offer the opportunity for the individual establishing the trust to ensure that their heirs are not required to go through the probate process; they can provide significant inheritance tax savings; and they can provide some peace of mind in the event of incapacity.
There are, however, a number of significant disadvantages associated with living trusts, and these must be taken into account when deciding whether or not such an arrangement is the right choice.
Financial SavingsOne of the most commonly cited reasons for establishing a living trust is a desire to save time and money for heirs after the death of the settlor. Indeed, a living trust can achieve this effectively; it is possible, to a greater or lesser extent, to avoid the process of probate through the efficient use of such a trust. This can mean significant savings for beneficiaries, who may otherwise have to endure a lengthy legal process.
Similarly, living trusts have the potential to mitigate or remove an inheritance tax liability. Again, this will obviously not provide any benefit to the settlor, but can represent a significant saving to the successor beneficiaries of the trust.
The costs of living trusts come during the lifetime of the settlor. In the first instance, it is always advisable to secure the services of a qualified legal professional to ensure that the trust is established correctly. Clearly this can be expensive, particularly as a good solicitor will consult extensively with the settlor in order to ensure that the plan devised is the most effective one possible.
Funding the trust can also be expensive. The most effective trusts are funded during the lifetime of the settlor – indeed, this is the only way of avoiding inheritance tax through living trusts. However, the funding process can also require the services of a solicitor; furthermore, it can be a time-consuming process. As such, the costs of establishing and funding the trust must be weighed up against the benefits to the heirs.
Tax IssuesThere are also a number of tax issues that should be considered. In the first instance, it must be remembered that establishing a living trust is highly unlikely to produce any tax savings during the lifetime of the settlor. As is explained in other articles in this section, any assets in a living trust from which the settlor still benefits will still be subject to income tax.
The only way in which tax savings can potentially be made is if the settlor is completely divorced from the assets, becoming neither trustee nor beneficiary. Clearly, however, this means giving up not only the legal title to the assets that are being transferred, but also the practical ownership. Many people are not in a financial position to do this, and it may not be the best option anyway.
While living trusts can be extremely useful, there are a number of drawbacks that must be taken into account. If you are considering establishing a living trust you should always factor these disadvantages into your calculations; you may wish to start by investigating solicitors’ fees.