Joint Living Trust Disadvantages

By Jeffry Olson, J.D.

Joint Living Trust Disadvantages

By Jeffry Olson, J.D.

A living trust is an agreement often used in estate planning that holds property or assets for the benefit of one or more persons, or beneficiaries. Living trusts allow property to pass to the beneficiary without the need for probate. A joint living trust is one created by two or more people, or grantors, who transfer property into that trust. The grantors can transfer property into and out of a living trust while they are still are alive. While joint living trusts offer several advantages—a major one being the avoidance of the probate process—they also bring several disadvantages.

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Conflicts and Potential Tax Issues

A joint living trust could result in conflicts between the parties. The parties may be in agreement on financial matters when they create the trust. However, this may not continue to be the case. Further, it is possible one of the parties may not fully disclose other financial interests that conflict with the interests of the other party. Carefully consider conflicts that may arise in the future prior to entering into a joint living trust.

State and federal inheritance tax issues might arise upon the death of one or more of the parties, often spouses, to a joint living trust. The value of the trust may exceed the inheritance tax exemptions. Division of the joint living trust after the death of one the grantors may also complicate tax considerations. It is important that the parties consult legal and tax experts before creating a joint living trust.

Management of Trust Assets and Debts

Depending on the language creating the living joint trust, when one of the parties dies, the other generally becomes the sole trustee. In that case, the deceased no longer has any control over management or distribution of the assets in the trust. The surviving trustee can distribute the assets at their discretion.

Debt may create issues for a joint living trust. If one of the parties dies and leaves considerable debt, creditors may seek to use the assets of the trust to satisfy some or all of that debt. The trustee must satisfy those debts before assets can pass on to the beneficiary of the trust.

In addition, if the trustee fails to pay off the necessary creditors, those creditors might be able to collect the debt from the beneficiary of the trust assets. When assets go through probate, a time limit is placed on how long creditors can seek to satisfy outstanding debts. Carefully consider the financial position of the parties, including their debts, prior to creating a joint living trust.

Cost of Creation

Creating a joint living trust can quickly become expensive. A complicated joint living trust will likely require legal advice. The more complex the terms of the trust, the more time it requires for an attorney to draft and the more expensive it will be.

Before deciding on the use of a joint living trust, it is important to understand its disadvantages. Conflicts between the parties may arise over time. They must consider any potential tax consequences and debts. Ongoing management of the trust upon the death of the first grantor should meet the wishes of all parties. Finally, the parties creating the trust should understand the cost involved.

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