Weaknesses and limitations
Funding and administration
| Issue | Consequence |
|---|---|
| Unfunded revocable trust | Probate still required for titled assets; plan fails main benefit |
| Wrong titling | Assets pass by will or law, not trust terms |
| Stale beneficiary designations | IRA/insurance overrides trust intent |
| No successor trustee named | Court or family dispute delays administration |
Tax limitations
| Issue | Consequence |
|---|---|
| Step-up lost on lifetime gifts | Donee takes carryover basis; estate tax saved but income tax on appreciation |
| Grantor trust status | Income taxed to grantor — intended in IDGT, surprise in poorly drafted ILIT |
| Compressed trust brackets | Undistributed income taxed heavily at trust level |
| QTIP inclusion at second death | Marital deduction at first death; full inclusion later |
| Portability not elected | Lost DSUE if no timely Form 706 |
| IRD assets | No basis step-up; estate and beneficiaries share IRD deduction rules |
| State estate tax | Illinois threshold below federal; bypass planning still relevant for state |
Legal and practical
- Trusts do not shield assets from creditors of grantor while revocable.
- Irrevocable trusts may trigger Medicaid look-back (not sourced here).
- Dynasty trusts limited by state rule against perpetuities (Illinois: prudent period rule).
- Divorce remarriage may conflict with prior trust beneficiaries.
- Co-trustee friction and family disputes increase with complexity.
Cost vs benefit
Simple estate (under federal exclusion, no state issues): RLT may add cost with limited tax benefit. Complex families, real property in multiple states, or estate tax exposure: trusts often justify cost.
Roth + trust-specific
See roth-iras-and-trusts.md: improper trust beneficiary designation is a frequent expensive error.
Sources
- p559-survivors-executors-administrators-summary
- inheritance-flow.md