What are the disadvantages of putting your house in a trust

The advantages of placing your house in a trust include avoiding probate court, saving on estate taxes and possibly protecting your home from certain creditors. Disadvantages include the cost of creating the trust and the paperwork. Take a look at the pros and cons of creating a trust before you put your house into it.

Avoid Probate

Most living trusts are structured to avoid probate and its costs. While some states have streamlined their probate process, many still require cost, time and attendance at multiple hearings. Most homeowners wishing to avoid probate and transfer title to their home to their heirs quickly find avoiding probate through a trust to be a strong advantage. Should you choose to transfer other properties, some of which are out of state, you will avoid probate in other jurisdictions, also.

Future Incapacity Protection

Should you become ill and unable to properly manage your own finances, another trustee can be selected to manage your trust to protect your home. Living revocable trusts give you this benefit. If you have a co-trustee that is your spouse, this can further simplify and protect your home. Your spouse can remain as trustee, managing your home and any other assets you've transferred to the trust.

May Save on Estate Taxes

While placing your home in trust generates no extra favorable tax treatment, you may save some estate taxes if your trust is designed properly. Much depends on how efficiently your financial plans for your estate have been constructed. Since living trusts are revocable, allowing changes or, even, dissolution, at any time, the trust and the grantor enjoy no beneficial tax treatment. Creating a trust without a good estate plan often saves little or no tax consequences.

Complexity and Cost Disadvantages

The complexity in designing a trust, as compared to a simplified will, can accelerate the costs to use this method of protection. Further, you must pay attention to the assets in a trust. Should you wish to shelter more than just your home, you'll need to be diligent to transfer other assets to the trust as you acquire them and remove those you no longer own. All of this attention can add legal costs to maintaining the trust.

Potential Disadvantages

If you place just your home in trust, your other assets will still be subject to probate, whether or not you also have a will. Even modest bank or investment accounts named in a valid trust must go through the probate process. Also, after you die, your estate may face more expense, as the trust must file tax returns and value assets, potentially negating the cost savings of avoiding probate.

Memorandum of Wishes – When setting up a discretionary trust it is common for the settlor to indicate to the trustees how the settlor would have dealt with those assets if they had retained ownership. The trustees will make a comprehensive note of these wishes in a written memorandum, to which they will refer when dealing with the trust property. The wishes of the settlor will not be binding on the trustees but, in practice, trustees would be reluctant to deviate unless a change in circumstance or other matters would make it clearly disadvantageous to the beneficiaries to act in such a way.

Protector – A ‘protector’ may be appointed to exercise some degree of control over the trust property. It is usual for a trusted friend, family relative or professional adviser of the settlor to be appointed, but it is also becoming increasingly common to use the services of a professional trust company. Sovereign is able to serve as a professional protector where we are not retained to act as trustees. In our view, it is unwise for a protector to be given anything other than powers to veto decisions or actions of the trustees. A protector that is empowered to direct the trustees actively might be deemed as a ‘quasi-trustee’ and this could have harmful consequences for the trust.

Two-tier company and trust structure – Greater flexibility can sometimes be achieved if the underlying assets are owned by a company that is in turn owned by a trust. The settlor, or an appointee of the settlor, can act as the director of the company, enabling them to exercise day-to-day control over the underlying assets with minimal interference or need to refer to the trustees. This two-tier structure can be used to good effect in certain circumstances but might have tax and other disadvantages if the director of the company is resident in a high tax country.

Joint trustees – A trust can be structured using joint trustees such that the agreement of both is required for any action. The second trustee could be the settlor or a company controlled by the settlor. Again, there may be negative tax or other consequences resulting if the settlor is resident in a high tax country. Alternatively, a ‘check and balance’ may be obtained by having two different professional trust corporations acting as joint trustees. This can be cumbersome and expensive but it may be suitable for certain trusts.

Private Trust Companies – A Private Trust Company (PTC) is a company formed for the specific purpose of acting as trustee of a single trust or a group of related trusts. Family members can participate in the management of the PTC and therefore in the decisions that need to be taken by the PTC as trustee, including decisions relating to the control and management of companies owned by the trustee.

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