What are the Disadvantages of a Revocable Trust?

By John Stevens J.D.

The popularity of revocable trusts, commonly referred to as “living trusts,” has been steadily increasing as the preferred method of transferring property either during life or after death. The most significant benefit of a revocable trusts is probate avoidance. If properly drafted, revocable trusts can also reduce estate tax liability. However, as with all estate planning devices, revocable trusts are not without disadvantages.

Expense

Revocable trusts require the drafting of complicated paperwork, particularly if property will be held in trust for minor children or will dispose of substantial assets. Unlike a will, in which assets are typically passed to the beneficiaries upon death, revocable trusts often keep property in trust even after death. Drafting the necessary provisions takes time, and time costs money if an attorney is hired to prepare the documentation.

Funding Requirement

Too often people have a trust instrument drafted but fail to transfer property into the trust. A trust instrument, by itself, is not a trust. The property to be distributed by the trust must be placed into the trust, a concept called “funding.” Property with title, such as a house, must be transferred to the trust for it to pass under the terms of the trust. Titled property is transferred by changing the title instrument to show the trustee as the property owner. Untitled property, such as furniture and clothing, must be listed in a trust attachment. Funding is not required for property to pass under a will.

Difficulty Refinancing Real Estate

When real estate is transferred into the trust, the property’s title is held by the trustee rather than by the property owners. This is not to say that the property owners no longer have control of the property, as the owners are typically also the trustee of the trust. Occasionally, financial institutions will challenge the ability of the property owners to refinance the property if the property is in trust. The rationale is that the trust owns the property. However, lenders are often willing to refinance property held in trust if they are provided with the trust instrument that shows that the property owners are the trustees. As an alternative, the property may have to be taken out of the trust, refinanced, then transferred back into the trust.

No Court Supervision Upon Death

The terms of a will cannot be carried out without the approval of a judge. This process is commonly referred to as “probate,” or “probating a will.” However, property held in trust can usually be transferred to the beneficiaries of the trust without court approval. Generally, this is not a problem, and by avoiding the probate process, a significant amount of time and money can be saved. However, the lack of court supervision means that a trustee could violate the terms of the trust and use the assets for him or herself. The beneficiaries can sue the trustee, but this assumes that the beneficiaries are aware of any wrongdoing by the trustee.

About the Author

John Stevens has been a writer for various websites since 2008. He holds an Associate of Science in administration of justice from Riverside Community College, a Bachelor of Arts in criminal justice from California State University, San Bernardino, and a Juris Doctor from Whittier Law School. Stevens is a lawyer and licensed real-estate broker.

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