What Are Reasons to Not Have a Trust?

Trusts offer a structured way to manage assets and direct their distribution, with advantages related to privacy and probate avoidance. However, creating a trust is not a universally appropriate solution. For many individuals and families, establishing a trust can introduce unnecessary costs, complexities, and constraints. Understanding the potential downsides is part of making an informed decision about whether this legal tool aligns with one’s personal and financial situation.

Costs of Creation and Maintenance

Unlike a simple will, a trust is a complex legal instrument that requires specialized legal expertise to draft correctly. The initial setup costs consist primarily of attorney fees, which can be substantial. For a standard revocable living trust, legal fees can range from $1,500 to over $5,000, and more specialized trusts cost considerably more.

Beyond the initial drafting, there are ongoing expenses. If a corporate trustee, like a bank or trust company, is appointed to manage the assets, they will charge an annual fee. This fee is calculated as a percentage of the assets under management, commonly ranging from 0.5% to 2% per year. Furthermore, if circumstances change and the trust document needs to be amended, additional legal fees will be incurred. These recurring costs can accumulate over the years, diminishing the value of the assets held within the trust.

Administrative Complexity and Recordkeeping

A trust only becomes effective after it is “funded,” which involves formally retitling assets so they are legally owned by the trust, not the individual. This means changing the name on real estate deeds, bank and brokerage accounts, and other property titles. This process involves significant paperwork and can be time-consuming; if overlooked, the trust is ineffective for any assets not properly transferred.

The administrative duties continue for the life of the trust. The trustee is legally obligated to maintain records of all transactions, including income received, expenses paid, and distributions made to beneficiaries. This recordkeeping provides transparency for beneficiaries and protects the trustee from potential liability claims.

Tax compliance adds another layer of complexity. If a trust earns more than $600 in a year, it must file its own federal income tax return using IRS Form 1041. This requires tracking the trust’s income and deductions separately and adhering to a different set of tax rules and deadlines.

Loss of Direct Control Over Assets

When an individual transfers assets into a trust, they legally relinquish direct personal ownership. The assets are then owned by the trustee, who holds them for the beneficiaries according to the trust’s terms. With a revocable trust, the grantor can serve as the initial trustee and retain the power to amend or dissolve the trust, making the loss of control less absolute.

The situation is different with an irrevocable trust. Once assets are transferred, the grantor permanently gives up the ability to make changes or reclaim the assets. This type of trust cannot be easily altered without the consent of all beneficiaries and sometimes a court order. This permanent loss of control is a primary reason individuals may hesitate to use an irrevocable trust.

Even with a revocable trust where the grantor acts as trustee, daily financial activities can become more cumbersome. For instance, selling a property owned by the trust requires the transaction to be executed in the name of the trust, with the trustee’s signature. This adds a layer of formality to transactions that does not exist with personal ownership.

Potential Tax Implications

Trusts can present tax-related drawbacks, particularly concerning income taxes. The structure of federal income tax brackets for trusts is highly compressed compared to those for individuals. This means that income retained by a trust can be taxed at the highest marginal rate at a much lower income threshold.

For the 2025 tax year, a trust will reach the top 37% federal income tax bracket once its undistributed taxable income exceeds $15,650. In contrast, a single individual filer does not reach that same tax bracket until their income surpasses $626,350. This disparity can lead to a higher tax liability for a trust that accumulates income rather than distributing it to beneficiaries.

For example, if a trust generates $50,000 in taxable income and retains it, a large portion will be taxed at the highest rates. If that same income were distributed to a beneficiary in a lower tax bracket, the overall tax paid would be much lower. This potential for higher taxation on retained income is a financial consideration that can make a trust a less attractive option.

Availability of Simpler Alternatives

The goals of avoiding probate and ensuring a smooth transfer of assets can often be achieved without the expense and complexity of a trust. Several simpler and less costly tools are available that allow assets to pass directly to designated heirs outside of the probate process.

Bank and investment accounts can be designated as “Payable-on-Death” (POD) or “Transfer-on-Death” (TOD). These designations are made by filling out a form with the financial institution to name a beneficiary. This transfer happens automatically upon the owner’s death and bypasses the instructions in a will.

Another strategy is holding property in joint ownership with rights of survivorship, where the property automatically passes to the surviving owner. Assets like life insurance policies and retirement accounts, such as 401(k)s and IRAs, also have their own beneficiary designations that take precedence over a will. For individuals with straightforward estates, these tools may be sufficient to meet their planning needs.