What Are the Disadvantages of a Trust? 5 Drawbacks You Should Know Before Setting One Up

Are you thinking about setting up a trust as part of your estate plan? Trusts have many benefits for protecting assets and managing wealth, but they also have some big problems that you should think about carefully.

I’ve helped many clients navigate these waters, and I always make sure they understand both sides of the coin before making decisions that could impact their financial future for decades to come.

The Hidden Costs and Challenges of Trust Arrangements

Trusts can be powerful tools for managing and protecting your wealth, but they’re not without their complications. Let’s dive into the major disadvantages you should be aware of before signing on that dotted line.

1. Significant Setup and Ongoing Costs

One thing that surprises a lot of people is how expensive trusts can be, both to set up and keep up.

Initial Setup Expenses

• Legal fees ranging from $1,000 to $3,000 for simple trusts
• Complex trust arrangements can cost upwards of $10,000
• Additional filing and recording fees, especially for real estate transfers
• Professional valuation services for business interests

Ongoing Maintenance Costs:

• Trustee fees (typically 0.5% to 2% of assets annually for professional trustees)
• Tax preparation expenses
• Accounting services
• Investment management fees

As LegalClarity says, “making the trust document is only the first step.” “Funding the trust” means transferring assets from your name to the trust’s name. This process requires more paperwork and may cost more.

We had a client last year who was shocked when the total bill for setting up their “simple” trust came to over $4,500 after all the associated costs were tallied. And that was just the beginning!

2. Loss of Control Over Your Assets

This is perhaps the most psychologically challenging aspect of trusts, particularly irrevocable ones.

When you put things in an irrevocable trust, you give up ownership and control of them. In the words of Dominion’s experts, “setting up the trust means giving up some control of the assets you put into the trust.” “.

This means:

• You can’t unilaterally change the terms
• You can’t easily modify beneficiaries
• You generally can’t take back assets once they’re in the trust
• Modifications typically require beneficiary consent or court approval

For many self-made wealthy individuals who built their fortunes through hard work and careful control, this surrender of authority can be extremely difficult. I’ve seen clients literally struggle to sign the final documents because the psychological barrier is so strong.

3. Complex Record-Keeping Requirements

Maintaining a trust isn’t a “set it and forget it” situation—it requires meticulous, ongoing record-keeping.

According to SmartAsset, “Trusts also require meticulous record-keeping and can be complex to understand and manage. There is a strict legal framework that must be adhered to, which can be daunting for many.”

This includes:

• Tracking every financial transaction
• Documenting investment decisions
• Maintaining detailed accounting records
• Regular communication with beneficiaries
• Annual reporting requirements

The administrative burden can be overwhelming, especially for trustees who aren’t professionals in the field. One of my clients compared it to “taking on a part-time job you never wanted.”

4. Potential Tax Burdens

While trusts can provide tax benefits in some situations, they can also create unexpected tax headaches.

LegalClarity points out that “Trusts are subject to their own set of tax rules, which can be less favorable than those for individuals.”

For the 2024 tax year, trusts reach the highest federal tax rate of 37% on undistributed income over just $15,200—a dramatically compressed tax bracket compared to individual taxpayers.

This means:

• Income retained in the trust is often taxed at higher rates
• Separate tax returns must be filed (Form 1041)
• More complex tax planning is required
• Potential for double taxation in certain scenarios

I’ve seen situations where poorly structured trusts actually created higher overall tax burdens than if the client had simply maintained personal ownership of the assets.

5. Limited Asset Protection in Some Cases

Not all trusts provide the asset protection many people assume they will.

SmartAsset notes that “not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets.”

This means:

• Revocable trusts provide virtually no creditor protection
• Even irrevocable trusts may be vulnerable to certain claims
• Protection varies widely by state law
• Fraudulent transfer laws can invalidate trust protections

We had a client who was devastated to learn that the revocable living trust they’d established specifically to protect assets from potential lawsuits offered absolutely no protection when they were actually sued. The court quickly pierced through the trust arrangement because the client maintained control of the assets.

Is a Trust Worth It Despite These Disadvantages?

With all these drawbacks, you might be wondering if trusts are worth the trouble. The answer, as with most financial planning questions, is “it depends.”

As Dominion explains, “All the disadvantages of a trust can be negated, minimized, or eliminated with the right setup, planning, and procedures.”

When a Trust Makes Sense Despite the Drawbacks:

1. For large estates facing potential estate taxes
2. For complex family situations requiring careful distribution of assets
3. For privacy concerns, as trusts generally avoid the public probate process
4. For incapacity planning, allowing seamless management if you become unable to manage your affairs
5. For special needs beneficiaries who need carefully structured support

When Alternatives Might Be Better:

1. For smaller, simpler estates where the costs outweigh the benefits
2. When immediate access to assets is a priority
3. When tax situations favor direct ownership
4. When administrative simplicity is highly valued

Making the Right Choice for Your Situation

The decision to establish a trust should never be made lightly or based on generic advice. It requires careful consideration of your specific circumstances, goals, and concerns.

Here’s a practical approach to deciding if a trust is right for you despite the disadvantages:

1. Clearly define your objectives – What specific problems are you trying to solve?
2. Consult with multiple professionals – Get input from estate attorneys, financial advisors, and tax professionals
3. Consider alternatives – Explore whether other tools might accomplish your goals with fewer drawbacks
4. Calculate the total costs – Both immediate and long-term
5. Assess your comfort level with surrendering control
6. Evaluate your willingness to handle administrative requirements

The Bottom Line on Trust Disadvantages

Trusts can be invaluable tools when used appropriately, but they come with significant drawbacks that deserve serious consideration. The costs, loss of control, administrative burdens, potential tax disadvantages, and limitations on protection can all impact whether a trust is the right solution for your needs.

As SmartAsset wisely concludes, “Deciding whether to open a trust largely depends on your personal situation… It’s essential to seek professional advice when considering such a significant financial decision.”

I’ve seen many clients achieve remarkable results with well-structured trusts, but I’ve also seen others regret rushing into complex arrangements that didn’t align with their actual needs or temperament.

When properly set up with experienced professionals who understand both the advantages and disadvantages, a trust can be a powerful component of your overall financial and estate plan. Just make sure you go in with your eyes wide open about the potential drawbacks.

Have you considered a trust for your estate planning? What concerns or questions do you have about the disadvantages? Feel free to share in the comments below!