Understanding the Pros and Cons of Trust Properties

Many people quickly assume that trusts are only fit for the wealthy minority. However, you don’t have to be part of the top 1% to take advantage of a trust structure.

So, What is a Trust Structure?

All trust structures have a common ownership structure: a trust is a fiduciary arrangement in which one party (the grantor) transfers property to another party (the trustee) to be managed for the benefit of one or more beneficiaries. Having a trust creates a clearer separation between the legal owner of the asset and its beneficiaries. Although in many cases the grantor is also the trustee, this is not always the case.

Pros of Trust Properties

1. Trust ownership can help your beneficiaries avoid the probate process.

One of the biggest benefits of owning real property in a trust structure is allowing your beneficiaries to avoid a probate court proceeding after your death.  If property is owned by you directly, then after your death your beneficiaries generally must undertake the slow, expensive process of or a probate court proceeding to settle title on the property.    This is true even if you have a will.  If property is owned in multiple states or countries, then multiple probate proceedings could be required. 

This can be prevented by setting up a trust during your lifetime and transferring ownership of the property to the trustee. In this case, after your death the property would be transferred to your beneficiaries in the manner you directed in the trust instrument, generally without court involvement.

2. Trust ownership facilitates efficient management of your property during periods of incapacity.

One of the most important aspects of estate planning is planning for the possibility, however remote, that you may not be able to manage your own affairs at some point due to illness or age. Trust ownership of property provides an efficient mechanism for your property to be managed by someone else of your choosing for your benefit during periods of incapacity, should that ever occur.

3. Trust ownership could reduce your tax burden.

In most basic trust structures (consisting of a revocable living trust), your property will be taxed the same in a trust structure as it would be if you held the property directly. However, if your estate is large enough to be subject to federal estate tax (currently estates over approximately $12 million, but expected to be reduced to approximately $6 million in 2026) or to a state estate tax (if you live somewhere other than California), then you may wish to explore irrevocable trust structures for your property that could shield future property appreciation from estate tax. 

Cons of Trust Properties

1.  You must fund your trust for it to be effective.

In order for the estate planning benefits of a trust to be achieved, you must properly fund the trust (i.e., transfer property to the trustee during your lifetime). For real property, this requires recording a new deed for the property.

2.   Establishing a trust involves lawyers and paperwork.

You need to work with a lawyer to establish a trust, which involves legal fees. Although the legal fees are typically lower to establish a trust than they would be for a probate proceeding after your death, the upfront cost for legal fees must be considered.  In addition, trust-based estate plans involve complicated legal documents that you must understand before signing.

At the end of the day, a little bit of paperwork and inconvenience is worth much more than the fees and time lost in probate—not to mention the stress that your beneficiaries have to go through to organize your affairs after your death.