Are You Considering A Revocable Living Trust?
May 15, 2017
Publications
The revocable living trust is often advertised as a “must have” part of your estate plan. While a revocable living trust may be useful in some situations, it is not an estate planning cure all. The following are issues to consider when deciding whether or not to include a revocable living trust as part of your estate plan:
Avoiding Probate – This is probably the most highly touted reason for using a revocable living trust. However, in Pennsylvania probate is not a complicated process, unlike the case in many other states. The Pennsylvania probate fees are relatively modest, although the fees vary from county to county. What you are paying for is court supervision over the executor, with the local Orphans’ Court making periodic inquiries as to how the estate administration is moving along. Court supervision is particularly important if the executor tries to administer the estate on his/her own without an attorney, with the beneficiaries sometimes waiting for years before receiving distributions. However, a revocable living trust can be very good for holding out-of-state real estate, because the need for probate in multiple states can be avoided, and many states have a more complicated probate process than does Pennsylvania.
Avoiding a Guardianship – If you become incapacitated, your trustee will be able to take over control of your trust assets without interference by a judge. With powers of attorney becoming increasingly difficult to use, particularly with increased bank regulation, a revocable living trust can be very useful to assist aging parents with their finances. Obviously, however, the trust must be set up while the parents still have the legal capacity to do so.
Privacy – Probate is a public proceeding. This means that anyone can go to the courthouse and take a look at each document in the probate file being stored there. This is to be contrasted with a revocable living trust – it doesn’t need to be filed with a court, so it won’t become a public record for everyone to see, while anyone can read a Will that has been admitted to probate. On the other hand, an unscrupulous trustee can ignore the terms of a trust and the trust beneficiaries may have no idea they were to benefit from the trust, because they have no way of finding out. It should be noted that in Pennsylvania inheritance tax returns are public record unless a court order is obtained, so this reduces the privacy advantage of a revocable living trust.
Getting Organized – When you set up and fund a revocable living trust, you will need to transfer your assets into it, and this, in turn, will force you to find account statements, stock certificates, corporate minutes, car and boat titles, and deeds to real estate. This will make your estate administration much easier for your heirs because you’ve taken the time to get organized and fund your trust. However, it is important that you stay organized and keep of your assets titled in the name of the trust.
Speeding Up Estate Administration – Sometimes a revocable living trust is advertised as speeding up estate administration and the distribution of assets. In Pennsylvania, the main hold-up in the estate administration process is the Pennsylvania inheritance tax, with the return due nine months after date of death, and the Department of Revenue usually taking three to six months to give tax clearance. An estate cannot really be concluded until the inheritance tax situation is resolved, and there is nothing a revocable living trust can do about that.
Higher Formation Costs – In general, it will cost more time and money to set up and fund a revocable living trust than it will to simply write a Will. Annual maintenance is needed, to make sure all assets are titled in the name of the trust. If there are some assets not in the trust, probate will be needed, and you will end up with a trust administration and a probate administration, which is more work, not less. A corporate trustee such as a bank or trust company will charge a fee based on the value of the assets in the trust. However, for many it can be worth it to have a professional overseeing one’s assets, particularly as one gets older. A revocable trust can be used for specific purposes, such as if one wants to have a trust company assume responsibility for one’s investments. Or a revocable trust can be used to hold a family vacation home property which has multiple relatives as owners.
Funding a Trust Can Be Complicated – Once your trust has been signed, you’re not done – you’ll need to contact your banks; investment and insurance companies; and transfer agents to change account and stock ownership and update beneficiaries; issue new stock certificates or assign partnership or LLC interests for closely held businesses; retitle cars and boats; and sign and record new deeds for real estate. For many people, this is the major drawback to using a revocable living trust – if it’s not fully funded with all of your assets, then it’s really not worth any of the money spent on it. The type of assets that you own and what will need to be done to get them into a revocable living trust should be carefully considered before you decide to use a trust. For example, it can be difficult to transfer assets such as time shares; oil and gas interests; and partnership interests into a revocable living trust.
You Still Need a Will – You still will need a Will even though you’ve taken the time to create a revocable living trust. Why? Because if your trust is only partially funded when you die, then you’ll need a special type of Will, called a pour-over Will to transfer your non-trust assets and pour them into your trust. Your pour-over Will must be probated, which is another reason why funding your trust is so important and a factor you’ll need to consider when deciding if you should use a trust, because you will still need a will anyway.
Saving Legal Fees – Sometimes “saving legal fees” is advertised as a reason for using a revocable living trust. It is true that setting up and funding a revocable living trust may save some legal fees down the road, but this is usually offset by the increased cost of setting up the revocable living trust. It is more important that legal fees are discussed with the attorney up front so that you understand the billing process, and whether the attorney charges by the hour or as a percentage of the estate, and whether lower hourly rate paralegals are going to be used to assist with estate.
Asset Protection and Saving Taxes – Revocable living trusts do not accomplish any asset protection and do not save any taxes. Asset protection can only be accomplished with an irrevocable trust where you have given up control over the assets in the trust. A revocable living trust does avoid probate fees, but in Pennsylvania probate fees are a relatively minor expense when compared to the the inheritance tax and other administration expenses. However, a revocable living trust does not reduce inheritance, estate or income taxes.
The revocable living trust can serve various useful purposes, but it is not for everyone. Beware of “living trust mills” which advertise how a living trust can save taxes, probate fees and make assets instantly distributable. For more information, please contact a member of the McNees’ Estate Planning Practice Group or David Watts at DWatts@McNeesLaw.com to assist you.
© 2017 McNees Wallace & Nurick LLC
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