The Benefits and Drawbacks of a Living Trust

A living trust is a legal tool used to manage and distribute assets during a person’s lifetime and after their death. It can be a helpful way to avoid probate, reduce taxes, and make financial transitions smoother for loved ones.

However, like any financial instrument, living trusts have both advantages and disadvantages. 

While they may work well in some situations, they may not be suitable for everyone. In Massachusetts, as in other states, individuals considering a living trust should carefully weigh these factors before deciding to create one.

At Coastal Legal Affiliates, P.C., located in Somerset, Massachusetts, we serve clients ​​throughout Bristol County and Plymouth County, including Somerset, Fall River, Swansea, Dartmouth, New Bedford, Wareham, Lakeville, Plymouth, Kingston, Rockland, Abington, Brockton, and Attleboro.

We’re here to help you weigh your options.

What Is a Living Trust?

A living trust is a legal arrangement where a person (the grantor) transfers ownership of their assets to a trust, which is managed by a trustee. The grantor often serves as the initial trustee and can retain control over the assets during their lifetime. 

The trust specifies who will receive these assets upon the grantor’s death, helping to avoid probate and possibly offering other benefits. The trust can be revocable, allowing the grantor to modify or dissolve it at any time, or irrevocable, meaning the trust cannot be altered once it’s created.

The Benefits of a Living Trust

There’s a reason so many people turn to this option for managing assets in life and death. From avoiding the process of probate to countless tax benefits, it’s crucial to consider these advantages.

Avoiding Probate

One of the main reasons people choose to create a living trust is to avoid probate. Probate is the court-supervised process of distributing a person’s estate after their death. This process can be lengthy, costly, and public. 

In Massachusetts, probate fees can be substantial, depending on the value of the estate. Since a living trust doesn’t go through probate, assets placed in the trust are distributed according to the terms of the trust without court involvement. This helps save time and money, making it a popular choice for many people.

The avoidance of probate also protects the privacy of the deceased person’s affairs. Probate proceedings are public records, meaning anyone can access details about the estate, including the beneficiaries and the value of assets.

A living trust keeps this information confidential, which can be important to individuals who prefer to keep their financial matters private.

Greater Control Over Asset Distribution

A living trust allows for detailed and flexible control over how assets are distributed. The grantor can specify exactly when and how beneficiaries will receive their inheritance, which can be particularly useful in cases where the grantor wants to impose conditions. 

For example, the trust could specify that:

• A beneficiary must reach a certain age before receiving their inheritance

• The inheritance is to be used for specific purposes, such as education or healthcare

Moreover, a living trust can provide for the management of assets if the grantor becomes incapacitated.

If the grantor is unable to manage their affairs due to illness or injury, the successor trustee named in the trust can step in and take over the management of the trust assets, providing a smoother transition without the need for a court-appointed guardian or conservator.

Protection from Legal Challenges

While living trusts can be contested, they generally offer more protection against legal challenges than a will. In Massachusetts, as in other states, will contests are relatively common. 

A living trust, by contrast, often requires more proof of undue influence or lack of capacity to succeed in a challenge. Since a living trust is a private document and doesn’t go through the probate process, it may be harder for disgruntled family members to dispute its terms.

Additionally, because the living trust is an ongoing arrangement, the grantor can make adjustments over time, potentially reducing the likelihood of misunderstandings or disputes.

If a change in circumstances occurs—such as a change in family dynamics or financial situation—the grantor can amend or revoke the trust to reflect the new reality.

Potential Tax Benefits

In some cases, living trusts can offer tax benefits, particularly for those with larger estates. While a revocable living trust typically doesn’t provide direct tax savings during the grantor’s lifetime, it can play a role in reducing estate taxes after death. 

When properly structured, an irrevocable living trust can be used to remove certain assets from the taxable estate, potentially reducing the estate tax burden. However, it’s important to note that living trusts alone don’t automatically reduce taxes for everyone. 

In Massachusetts, estate taxes can apply to estates valued at over a certain threshold, and planning for this tax requires careful attention to the structure of the estate. While a living trust may help, it’s only part of a comprehensive estate plan that may include other tax-reduction strategies.

The Drawbacks of a Living Trust

As there are many benefits to opting for this path, our president and founder, Patrick T. Matthews, Attorney At Law, knows that it’s important to also highlight the potential downsides of a living trust. These include everything from cost, taxes, difficulties, and creditor issues. 

Initial Setup Costs and Maintenance

Although living trusts can provide significant benefits, they do come with costs. Setting up a living trust involves legal fees for drafting the trust document, which can range from a few hundred to several thousand dollars depending on the details of the estate and the attorney’s fees. 

Massachusetts residents should be aware of the costs associated with creating a trust and decide if the benefits outweigh the initial expense. Additionally, a living trust requires ongoing maintenance.

If the grantor acquires new assets after the trust is created, those assets must be transferred into the trust to avoid probate. 

Failure to transfer assets into the trust can result in them being subject to probate, defeating the purpose of setting up the trust in the first place.  Over time, as financial situations change, the trust may need to be amended or updated.

These additional steps can involve more legal fees and time investment, which could be seen as a disadvantage for some people.

No Immediate Tax Relief for Revocable Trusts

While irrevocable living trusts can offer some tax advantages, revocable living trusts generally do not provide any immediate tax relief. 

A revocable living trust allows the grantor to retain full control over their assets during their lifetime, meaning the assets are still considered part of their taxable estate. As a result, revocable living trusts don’t provide the same tax benefits as irrevocable trusts, such as the removal of assets from the taxable estate. 

Furthermore, because revocable living trusts don’t change the ownership of the assets for tax purposes, they don’t reduce the estate tax burden during the grantor’s lifetime. If tax savings are a primary consideration, individuals may need to explore other strategies, such as:

• Gifting assets

• Setting up irrevocable trusts

Potential for Confusion and Errors

The process of transferring assets into a living trust can sometimes be confusing, especially for those unfamiliar with estate planning. For example, some individuals may fail to properly transfer all of their assets into the trust, which can lead to parts of the estate going through probate. 

In Massachusetts, if an asset is not properly titled in the name of the trust, it could be subject to probate. This is a common issue for individuals who create a trust but fail to update all of their financial accounts, real estate, or personal property accordingly.

Additionally, if the trust document isn’t drafted carefully, it may not reflect the grantor’s true wishes, leading to potential legal disputes or confusion among beneficiaries. While trusts are often more difficult to contest than wills, they’re not immune to challenges, particularly if they’re unclear or ambiguous.

Limited Protection From Creditors

Another limitation of a living trust is that it doesn’t provide complete protection from creditors. Since a revocable living trust allows the grantor to retain control over their assets, those assets are still subject to claims by creditors during the grantor’s lifetime. 

If the grantor becomes involved in legal disputes or faces financial difficulties, creditors can still access assets held in a revocable trust. 

While irrevocable trusts offer more creditor protection, the trade-off is that the grantor relinquishes control over the assets. For those seeking to protect their assets from creditors or lawsuits, an irrevocable trust may be a better option, but it comes with its own set of challenges.

Enlist Experienced Legal Counsel From Our Firm

By weighing both the benefits and drawbacks, individuals can create an estate plan that meets their needs and sees that their wishes are carried out.

We serve clients throughout Bristol County and Plymouth County, including Somerset, Fall River, Swansea, Dartmouth, New Bedford, Wareham, Lakeville, Plymouth, Kingston, Rockland, Abington, Brockton, and Attleboro.

Reach out to Coastal Legal Affiliates, P.C. today to see how we can help you with your living trust.