Pros and Cons of Trusts

CONS:  There are several reasons not to set up a trust.  First, the set-up expenses of a trust are more than the cost of a will or simply doing nothing.  Second, a trust does not eliminate all work at death.  Assets still must be gathered and distributed, and at least one accounting must be prepared or waived by all trust beneficiaries.  Third, Estate taxes still might have to be paid.  Fourth, in the case of a married couple, a trust can necessitate an annual informational income tax return between the first and second deaths.

PROS:  Trusts have three principal advantages.

First, trusts eliminate the need for probate and its attendant delay, expense, and publicity.  Assets can be disbursed quickly,  without waiting for court approval of a will and the appointment of an executor or administrator. Probate fees are avoided, although an attorney's help is generally indicated to oversee collection and distribution of assets and the filing of necessary tax returns.  Distributions from the trust are private; there is no public probate record for the world to see.

Second, trusts can safeguard inheritances by imposing lawful restrictions on the beneficiaries' use of the trust assets.  Trusts can also provide some protection from creditors other than those of the donor.

Lawful restrictions include requirements that the beneficiary test clean for drugs or be gainfully employed before he or she receives any money.  A provision that prohibits a widow from remarrying, however, is illegal and will not be enforced.

Spendthrift clauses can protect trust assets from most creditors.  In California and most other states, child support and spousal support can be taken from a trust against the beneficiaries' wishes, notwithstanding a spendthrift provision that insulates trust assets from the claims of other creditors.  Properly drawn trusts in Nevada and Iowa, however, might hold even child and spousal support claimants at bay.

Inheritances left to children free of trust often find their way into the community property of the child and her spouse. Unless appropriate records are kept, the child risks losing  her right to be reimbursed by the community if her marriage is dissolved.  An inheritance left in trust, in contrast, can be protected in the event of the child's divorce.  Even at-death transfers to spouses can have unintended consequences.  See the case of Bubbles and Bruno.

Third, trusts can save taxes.  Every individual  is entitled to a credit against Federal Estate Taxes.  That credit is like a coupon:  If you don't use it, you lose it.  The credit amount was $1,000,000.00 for U.S. citizens who die in  2002. That amount increased in stages to $3,500,000.00 in 2009.  If a husband and a wife's net estate is less than that amount, and both are United States citizens, no estate tax will be due.  But if the husband dies in 2002 and simply leaves his half of a million-dollar estate to his wife, even slight appreciation could swell her estate beyond $1,000,000.00.

If the wife were to die in 2003, and assuming that she is a U. S. citizen, her now-swollen estate, to the extent it exceeds $1,000,000.00, will be taxed at rates begriming at 41%.  If appreciation between the deaths is just four percent, the wife's estate could increase to $1,040,000.00, resulting in an estate tax of $16,400.00.

The husband's credit amount or coupon can be saved by leaving his one-half of the couple's property in a credit shelter trust. 

This website is lawyer advertising, in that it contains general information that  varies in its application to the specific facts of each case.  Nothing on this website is to be construed as legal advice or the formation of an attorney-client relationship.  E-mail or other communication sent before consultation with Attorney Foster will not be confidential.