Family trusts are often described as a smart estate planning tool, and for many families they can be. But what are the disadvantages of a family trust? Like any planning strategy, a trust comes with costs, responsibilities, and tradeoffs. Understanding them before you create one can help you decide whether a trust truly fits your goals.
Estate planning is deeply personal, and the right structure depends on your family, your assets, and your wishes. This article explains what a family trust is, the potential drawbacks to consider, and questions to raise with your attorney and advisor.
What Is a Family Trust?
A family trust is a general term for a trust created to hold assets for the benefit of family members. The person who creates the trust is often called the grantor. A trustee manages the assets, and beneficiaries receive the benefits according to the trust's terms.
Revocable vs. Irrevocable Trust
Revocable trust: Often called a living trust. The grantor can generally change or cancel it during their lifetime and usually keeps control of the assets.
Irrevocable trust: Generally cannot be easily changed once created. The grantor typically gives up control of the assets placed in the trust.
The disadvantages of a family trust can look very different depending on which type you choose.
Why Families Consider Trusts
Families may use trusts for several reasons, including avoiding probate for assets held in the trust, keeping matters private, managing assets for young or vulnerable beneficiaries, and planning for how wealth passes across generations.
Common Disadvantages of a Family Trust
Here are drawbacks that families often weigh.
Upfront Cost
Creating a trust typically costs more than drafting a simple will. Legal fees depend on the complexity of the trust and your estate.
Ongoing Administration
Trusts require ongoing attention. Depending on the type of trust, this may include:
Recordkeeping: Tracking assets, income, and distributions.
Tax filings: Some trusts must file their own tax returns.
Trustee fees: Professional trustees often charge for their services.
Periodic reviews: Updating the trust as laws and family circumstances change.
Funding the Trust Takes Effort
A trust only controls the assets that are actually placed in it. Retitling bank accounts, investment accounts, and real estate into the trust takes time. Assets left outside the trust may still need to go through probate.
Loss of Control with Irrevocable Trusts
With an irrevocable trust, you generally give up direct control of the assets. If your circumstances or wishes change, making adjustments can be difficult.
Limited Benefits from Revocable Trusts
A revocable trust generally does not reduce estate taxes and typically does not protect assets from the grantor's creditors, because the grantor still controls the assets.
Trust Income Tax Rates
Income kept inside certain trusts can reach the highest federal income tax brackets at much lower levels of income than for individuals. Distributions to beneficiaries can shift some of that income, but planning is needed. Check current IRS guidance for trust tax brackets.
Family Dynamics
Trusts can create tension if beneficiaries disagree with the trustee or feel the terms are unfair. Choosing a trustee and explaining your intentions can help reduce misunderstandings.
Possible Loss of Basis Planning Opportunities
Assets held until death in some structures may receive a step up in basis, while assets transferred to certain irrevocable trusts during life may not. This tradeoff can matter for families with highly appreciated assets.
For more background on trusts, read our article on trust and estate planning.
Family Trust Pros and Cons at a Glance
Potential Advantages
Probate avoidance: Assets properly held in a trust may pass outside of probate.
Privacy: Trust terms are generally not part of the public record.
Control over distributions: You can set terms for when and how beneficiaries receive assets.
Planning for incapacity: A successor trustee may step in if you cannot manage your affairs.
Potential Disadvantages
Cost: Higher upfront and ongoing expenses than a simple will.
Complexity: Funding and administration require effort.
Rigidity: Irrevocable trusts can be difficult to change.
Tax considerations: Trust tax rules can be complex.
Questions to Ask Before Creating a Family Trust
What problem am I trying to solve? Probate, privacy, control, taxes, or something else.
Would a simpler tool work? Beneficiary designations or a will may meet some goals.
Who should serve as trustee? Consider skills, availability, and family relationships.
How will the trust be funded? Make a plan to retitle assets.
How will the trust work with my investments? Coordinate trust assets with your overall investment strategy.
When should we review it? Plan to revisit after major life or law changes.
Tennessee Considerations
Tennessee repealed its inheritance tax and does not have a separate state estate tax. That means many Tennessee families focus on federal estate tax rules and nontax goals such as privacy, control, and probate avoidance when considering a trust. State trust laws vary, so working with a Tennessee attorney is important.
How ProffittGoodson Supports Families with Trusts and Estates
At ProffittGoodson, our work begins with gaining a deep understanding of your financial life. We look at tax strategies, investment planning, and estate considerations together, and we often coordinate with tax and legal professionals.
Our approach is built around multidimensional service, disciplined investing, and clarifying counsel:
Understanding you first: Learning your wishes for your family and legacy.
Connecting money to meaning: Aligning your money decisions with your life goals.
Objective guidance: Recommendations guided by the objective of supporting your long-term goals, without the influence of hidden motivations.
We utilize disciplined investing to provide reassurance and continuity for our clients' legacies.
Who We Serve in Knoxville and East Tennessee
ProffittGoodson Private Wealth works with private clients and nonprofits. We offer personalized financial planning in Knoxville and East Tennessee for multigenerational families, retirees, and trusts and estates, among others.
Visit our Who We Serve page or meet our team.
Start the Conversation
A family trust can be a helpful tool, but it is not right for everyone. If you would like to talk through how a trust may fit your estate plan, we invite you to contact ProffittGoodson. You can also join our Wealth Journal for monthly financial market perspectives and wealth management insights from our team.
Frequently Asked Questions
What are the disadvantages of a family trust?
Common disadvantages include upfront legal costs, ongoing administration, the effort to fund the trust, loss of control with irrevocable trusts, complex tax rules, and possible family tension.
Is a family trust worth it?
It depends on your goals. Trusts may help with probate avoidance, privacy, and control, but they add cost and complexity. An attorney can help you weigh the tradeoffs.
Does a revocable trust protect assets from creditors?
Generally, no. Because the grantor keeps control of a revocable trust, its assets are typically still reachable by the grantor's creditors.
Do trusts pay higher taxes?
Income kept inside certain trusts can reach the highest federal tax brackets at lower income levels than for individuals. Check current IRS guidance.
What happens if a trust is not funded?
Assets not placed in the trust are not controlled by it and may need to pass through probate or according to beneficiary designations.
Can you change a family trust?
A revocable trust can generally be changed during the grantor's lifetime. An irrevocable trust is much harder to change, though some options may exist under state law.
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