Trusts come in all shapes and sizes and can be effectively used to solve for a variety of planning challenges.

You want to ensure a minor child can’t blow his inheritance on a Ferrari and instead monetarily encourage him to go to college? A trust works for that.

You want to save on estate taxes? A trust works for that.

You want to protect your assets from Medicaid estate recovery or long-term care costs? A trust works for that.

You want to protect a family legacy property (e.g., lake house or farm)? A trust works for that.

But, while a trust “works,” it does not mean that a trust is the best option. Too often a trust is a proposed solution without consideration of the commensurate challenges of using a trust.

The question is whether the juice is worth the squeeze. Let’s look at the downside to trusts as planning solutions through the lens of a hypothetical situation where the author admittedly cherry-picks facts and the type of trust to showcase the issues.

A hypothetical situation

John and Jane have a net worth of $2.6 million comprised solely of a non-retirement investment account. John and Jane have been married 40 years and have three kids (two from this marriage and one from Jane’s first marriage). John passes away first. The estate plan drafted by John and Jane has John’s share of the assets ($1.3 million) go into a spousal trust for Jane to both provide creditor protection and to eliminate the estate tax (both of which can be accomplished with this type of trust).

What’s the downside? Taxation.

This kind of trust is a separately taxed entity requiring both its own tax ID number and its own annual tax return. This alone adds some complexity and cost for Jane to navigate as she is now responsible for both her own tax return and the tax return for the trust. But there’s more.

For 2025, a couple filing a tax return doesn’t hit the top tax bracket of 37% until they make $751,600. Contrast that with trusts that hit the top tax bracket of 37% at just $15,650. This means that trusts pay higher tax.

The higher tax hit can be mitigated with distributions to Jane (effectively shifting the tax burden to her at her own marginal tax rates), but there is complexity in navigating the best strategies to shift that burden and specialized drafting in the trust that might be required.

Ownership and control

For the entirety of their marriage, the money has been their money, subject to their control and ownership.

Either could do whatever he or she wished with the money. That all changes once it goes into the trust.

The trust only works because there are real ownership and control differences. But, it could be a shock to Jane. No longer can she do as she wishes with the assets in the trust. She is entirely limited to the rules enunciated in the governing document (the trust). And, where the document isn’t specific enough or doesn’t provide instruction, state law controls.

Jane has never been a trustee of a trust before and doesn’t feel comfortable interpreting the trust, let alone understanding the body of trust law as it has been written into law and later interpreted through court cases.

As a practical matter then, she needs legal advice by way of a paid attorney to understand her new relationship with the trust and her responsibilities to the trust assets and beneficiaries.

A key piece is that money in the trust is not owned by Jane. Instead, it has two distinct sets of people it is required to serve.

First, is Jane as the current income beneficiary of the trust. But, equally importantly, the trust must also serve the children as they now have a vested interest in the assets of the trust as so-called remainder beneficiaries.

Reporting

As part of the body of law referenced above, Jane has a new reporting responsibility. She has a duty to keep all beneficiaries reasonably informed about the trust, its investments, its income, distributions and expenses.

This customarily results in a requirement for Jane to deliver an annual report to all beneficiaries (i.e., her kids) detailing the trust and its transactions and holdings.

It is that detailed report that gives the kids the knowledge to understand whether Jane is fulfilling her duties as trustee or not.

Liability

If Jane fails in her duty as trustee, she is subject to the potential of personal liability from the remainder beneficiaries (her kids). That is, her kids can sue her if she fails as trustee. Of course, a lawsuit from a child is rare and Jane has other tools to protect herself (notably she has the threat that she will deny any child that sues any portion of the other $1.3 million still in her name).

Worth the squeeze? 

Trusts are undoubtedly an excellent planning tool in a variety of circumstances. But they don’t come without cost. Somebody should help Jane and John understand if the juice is worth the squeeze.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.