Six Reasons You Don't Want a Living Trust

By David Disraeli · © 2005–2025 360NetWorth, Inc.

Living Trusts are a hot topic among seniors and are used to fill up meeting rooms for attorneys, financial planners, and insurance agents. In certain instances, they can be very effective planning tools. In others, they're burdensome and expensive. This article will help you decide whether a Living Trust is right for you, or if you have one, how to make the most out of it.

What Is a Living Trust?

The term Living in Living Trust represents what attorneys make by selling them — a living. The technical term is "inter-vivos" trust, which is Latin for "while living." Unlike most trusts, this type benefits you while you are alive. Another term often used is "Revocable Trust." These trusts provide benefits during the creator's lifetime, but the key factor is that they are revocable — meaning the creator can dissolve or modify the trust at any time.

Unfortunately, Living Trusts are over-marketed and misunderstood. Proponents use fear to sell their ideas: fear of probate, fear of the court system, and fear of lawyers. They conjure up images of loved ones spending all their time in court when a Living Trust avoids probate. They say that a Living Trust is private and a will is a public record — as if your neighbors are going to head down to the courthouse the week after your funeral to see what you left and to whom.

Let me share a little secret: if your neighbors care to know your business, there are ways to find out right now. They don't have to wait until you die.

The Six Reasons

1. Probate Is No Big Deal (in Texas)

Probate in Texas is very different from many other states. In Texas, we have a process called "independent administration." This simply means that you or the executor can probate an estate independently from the court. You still need to make a court appearance and you still need a death certificate, but this form of probate assumes you have no property outside of Texas — and most people don't. Bank accounts and other financial instruments can also be probated independently. The bottom line: people fear probate when they shouldn't.

If you live in a state that does not have independent administration, this section may not apply.

2. Living Trusts Can Be Very Expensive

Since most people create Living Trusts along with several other documents, the exact cost is not always clear. You still need a will to handle any assets not in the trust. Unless the entire estate is distributed outright at death, additional trusts will be required to handle the assets coming out of the Living Trust. Creating a Living Trust almost always involves at least three separate documents. A couple could spend upwards of $1,000 extra — which is a lot of money if you don't need one.

3. Living Trusts Can Be a Maintenance Nightmare

Unless you have a very simple estate (in which case you probably won't have a Living Trust), the trust will not be effective unless you transfer all your property into the new entity. Transferring cash involves writing a check, but real estate is a whole different story.

Most people invariably forget to change a beneficiary or transfer an asset, which can defeat the purpose of the trust in the first place. Beyond the initial setup, you must continue to do business in the trust's name — every bank account, brokerage account, car, or property purchase must be done in the name of the trust.

4. You Don't Need a Living Trust to Avoid Probate

Technically, transferring a watch would require probate. But practically, you can transfer all your assets to your spouse or next of kin without probate — and without a Living Trust. Joint bank accounts pass to the surviving tenant automatically. Life insurance, annuities, IRAs, and pensions all pass outside the probate system. By titling your property differently, it is likely that you could avoid probate without the time or expense of preparing a Living Trust.

Joint Tenants With Rights of Survivorship means the bank doesn't have anything to say about the transfer of benefits between tenants. They may never know one of the tenants has passed away. (It's a good idea to get the deceased person off the account, because if the surviving tenant dies, the prior decedent will "get" the money — and a dead person can't cash a check, because they don't normally look like their photo I.D.)

5. There Are No Tax Savings or Creditor Protection

Many people mistakenly believe that Living Trusts will save estate taxes. They may save court costs, but they won't save a nickel in estate taxes. The assets in a Living Trust are still in your estate because you retain control. The only way to move assets out of your estate before death is to gift them — which could trigger a gift tax (except for the annual exclusion).

The confusion lies in the fact that most Living Trusts are combined with a credit shelter trust (also called a bypass or A-B trust). Under current law, spouses can pass assets to each other without any estate taxes. However, each spouse is allowed to leave up to a certain amount to an heir tax-free — but they lose this benefit if they leave everything to their spouse first. So attorneys create a Living Trust that funds a bypass trust at the first death, creating a significant estate tax savings. Importantly, it isn't the Living Trust that creates the savings — it's the bypass trust, which you can do with just a will.

For the same reason there are no tax savings, there is no creditor protection. If you place assets in a Living Trust and you are sued, the assets are just as easy to capture as they would be in your name — because the trust is revocable. People mistake the word "trust" for protection, but this is a false sense of security.

6. There Is Probate in Your Future Anyway

There is no way to avoid probate completely outside of dying with no assets — and that would require dying wrapped in a paper towel, because even your clothes are part of your estate. If you were in the process of inheriting money yourself, had money in the state's unclaimed property account, or simply forgot about an asset, you will need to probate your estate.

This isn't just a way to keep lawyers well-fed. Transferring property from a deceased individual requires proving they are dead, proving they intended to leave assets to someone, and proving who has the authority to execute those instructions. In other words, you're going through probate one way or another. What a Living Trust does extremely well is make the process of moving assets very fast — instant — and without probate. It's just not practical to have all your belongings in a Living Trust.

When You Actually Want a Living Trust

Now that I've laid out many reasons you don't want a Living Trust, you may want to know why you would.

Wills have some real disadvantages. While I don't think it's worth the hype, the fact is your will is a public document. For some people, privacy is so important they will go to great lengths to protect it. Probate can be time-consuming if there are problems. Wills can also be contested — meaning an interested party can tell the judge they intend to challenge the will, and the entire process stops dead in its tracks. This party doesn't even have to be a relative or have any legitimate claim. Although it doesn't happen often, it's not pleasant when it does.

A Living Trust, on the other hand, does not need to be probated and is extremely difficult to challenge. If it is challenged, the challenge takes place after the beneficiaries are already enjoying the property in question.

There is one other major reason to consider a Living Trust: the prospect of becoming incapacitated or legally incompetent. Alzheimer's, severe pain, accidents, and a myriad of other conditions can cause mental impairment such that a person is no longer legally able to act in their own best interest. A Living Trust provides for the management of your assets if this happens.

A Durable Power of Attorney also allows someone else to act on your behalf, but it has limitations:

• A durable power of attorney is a blank check. You better trust whoever you appointed, because they can manage your money until it's gone. A Living Trust provides much more detailed language about what the trustee can and cannot do.
• A durable power of attorney can be challenged by a financial institution. If you get sick and your "attorney in fact" goes to the bank, the bank may question whether the power has been revoked. Living Trusts don't share this issue — the trustee has the power to act when the creator is medically incapacitated.

Living Trust Checklist

The following questions will help you determine if a Living Trust is right for you — or if a will and durable power of attorney are sufficient:

1. Do you have assets over $500,000?
2. Do you have property in multiple states?
3. Are you extremely uncomfortable with your will being a public record?
4. Do you trust the person named as power of attorney to handle your money?
5. Do you think someone may challenge your will?
6. Are you the type of person who would take the time to fund and maintain a Living Trust?

Your answers to these questions will help drive the decision. It is not something that can be taken lightly. The decision for or against a Living Trust must come in the context of a complete estate plan and evaluation.

Before Meeting with a Professional

Before going to see an attorney or advisor, prepare the following items. This will help you make the most of their time and save you money:

1. A list of account numbers along with values, account titles, and beneficiary designations
2. List of property, how it is titled, mortgage balance, and current value
3. Copy of all current legal documents
4. Monthly income needs of each spouse
5. Names, addresses, and phone numbers of all beneficiaries, potential trustees, and other advisers

Review Questions for Existing Plans

1. Do you have successor trustees and attorneys named in your documents?
2. Are there any minor children who could stand to receive property from your estate? If so, do you have the language to create a trust for them?
3. Do you still have confidence in the people you've named as trustees or executors? Are they still willing to act?
4. Do you have a will? Durable Powers? Living Will? Bypass Trust? Medical Powers?

Key Terms

Attorney in Fact — The person named in a power of attorney to act on your behalf. It can be a person or a trusted company.

Beneficiary — The persons to whom assets go in the event of death. They can also be the people who benefit from assets in a trust.

Joint Tenants With Rights of Survivorship — A form of property ownership or account title where the owners share jointly and severally. At the death of one tenant, ownership passes to the other tenant(s).

Tenants in Common — Each tenant shares equally in the account or asset. At death, the ownership follows the path in the tenant's will.

Payable Upon Death — A mechanism banks use where accounts are payable to a beneficiary at death, avoiding probate.

There are many considerations in estate planning. Although there is no substitute for an extensive meeting with a qualified professional, you can prepare in advance. At a minimum, a Living Trust should be evaluated in the context of the total picture.

For more information call (512) 464-1110, email david@360networth.com, or book a free call.

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