It was not too long ago that those of us who do estate planning first heard of the term “living trust”. Perhaps it was an article in Money, Kiplinger’s, or AARP’s monthly magazine; or, perhaps most likely, something overheard sitting by the pool.
Quite simply, a trust is an arrangement where one person entrusts his or her assets to another person (the trustee) for a specific purpose. Typically, a gift under a will to a child will be given to a trustee to be invested and used by the trustee for the child’s support and education until the child attains a specific age. Trusts can also be created by a living person for a wide variety of purposes.
Trusts fall into two categories: revocable, in which the settlor (the person creating the trust) may make changes at will; and irrevocable, in which the settlor may make no changes after the trust is created. There is an enormous difference between the two, and they can serve vastly different purposes. Our focus is on the revocable trust which is the format used for the living trust.
What is the attraction of a living trust, and is it an estate planning device which might suit your purposes? To spare you the suspense, as a general rule we do not believe there is much advantage in creating such a device for most people in Pennsylvania.
To create a living trust a person generally transfers all of his or her real and personal property to a trustee with instructions to maintain them in trust for life with instructions on distribution of the assets upon death. The trustee can be one or more persons or an institution (a bank or management company); and as indicated above, the settlor retains full control as to the manner in which the trustee deals with the assets, the hiring and firing of the trustee, the disposition of the assets at death, and the termination of the trust.
What follows is a brief summary of the advantages and disadvantages of such a trust:
Avoiding Probate. Probate occurs when a will is filed of public record after a person’s death; obviously, if all of the assets are in trust with instructions for disposition on death, no will is required, and there is no need for probate. Ever since the late 1960’s when Norman Dacy wrote his very successful book How to Avoid Probate, there has been an almost mortal fear of probate; however, the horrors he describes in his book have not been the case in Pennsylvania, and in most states where probate was then a costly process, this has been corrected by legislation. In Pennsylvania probate filing fees are modest, and attorney’s fees involved in administering the transfer of assets will probably be comparable whether there is a will or a living trust.
Privacy. Trust agreements are not entered of public record, as a rule, but as explained above wills are (upon death). For some, the idea of making public the terms of a will is repugnant, but how public is it? The Register of Wills office is hardly overrun with people checking out the affairs of others, mostly just lawyers in dark suits. In any event whether a decedent leaves behind a trust or a will, his estate must file a state inheritance tax return which contains a detailed accounting and is readily available to those of prying eyes.
Centralized Management of Affairs. Some find it appealing to have all of their assets in one “place”; to form a living trust is to be forced to take inventory of your assets which is something many of us defer on an almost perpetual basis. To identify all of your assets and measure the return you are realizing has to be a wholesome exercise; and if a living trust impels a person to do so, this may be the single best reason for it. However, with or without a trust this is something with a bit of discipline anyone can and should do at scheduled intervals.
Costs. Creation of a living trust will cost more than creation of a will; the document generally is more complex, and all of the real and personal property will be transferred into the name of the trustee. And if there is dissatisfaction with the trust or the trustee, more tranfers will have to be made. As a rule, it is also easier and less costly to revise a will. We have already indicated above that in Pennsylvania and many other states the expense of probate of a will is modest and should not be a determining factor.
Taxes. Essentially the inheritance and estate taxes to be paid on death under a living trust or a will are identical. Since a living trust is revocable, any transfer to it is not deemed to be a completed gift to the beneficiary because the transfer can always be reversed until the settlor dies. Therefore, when a person dies, the taxable assets of his or her estate will be the same in either circumstance.
Incapacitation. Another point some people make is that if a person should become unable to manage his or her affairs, the living trust makes it much easier to do so. However, the same thing can probably be accomplished at a fraction of the cost using a “durable” power-of-attorney.
Other Considerations. An ideal feature of a will is that it can be revised at any time without involving a trustee or transferring title to properties; revoking or modifying a trust can involve a trustee or transferring title to properties; revoking or modifying a trust can involve much more money, especially if it involves additional transfers of assets.
Have we made our point? We must stress that there can be situations where the living trust is the right device, but generally these have more to do with family circumstances than estate planning. As a general rule we would advise that there are simpler, less expensive, and more effective methods of conserving and investing your estate than by employing the revocable living trust.
– Ken Butera