We frequently speak with clients who already have or who are contemplating the creation of a “living trust” or, more formally, a “revocable trust.” These vehicles are heavily marketed by attorneys and other estate planners as a means of avoiding probate, smoothing out the post-death administration process, and reducing costs. These vehicles gain an added luster when commentators such as Suze Orman sing their praises on national television.
Suze’s presentation on public television makes a pretty convincing case for use of a living trust in California. However, our firm’s estate planning lawyers disagree with the use of such trusts by most Pennsylvanians, most of the time. The main selling points of these trusts according to those who tout them is that they allow the decedent’s family to avoid probate and reduce costs. However, in Pennsylvania, the probate process itself is not as lengthy or expensive as it is in most states. Moreover, Pennsylvania inheritance tax applies to assets in a revocable trust just as surely as they apply to assets not in trust.
The first problem: probate is never completely avoided. Not all assets have paper titles and it is cumbersome (maybe impossible) to include all of a person’s assets in a trust during his lifetime. The result of this is that the decedent needs what is known as a “pour-over will” to serve as a catchall for all of the items that did not formally get titled in the name of the trust. Because a will is needed, probate is not avoided and the perceived “benefit” of the revocable trust is usually negligible. In connection with this, we were recently called for help by a lawyer who thought he had only a living trust to contend with. Nearly two years after the decedent’s death the Court forced him to probate the “pour over will” that accompanied the trust. The situation underscores the fact that one cannot completely avoid probate.
Various inconveniences go along with having and owning a revocable trust. First, to the extent the trust is going to serve its purpose of “avoiding probate”, all of an individual’s titleable assets such as real estate, cars, bank accounts and brokerage accounts, must be titled in the name of the trust. Thereafter whenever an individual makes a sizable purchase, those items should also be included in the trust. Some trusts claim to include all the grantor’s property, down to grandmom’s wedding ring and grandpop’s watch, in the trust. This is a questionable claim, and it’s unlikely that most people realize this when they take the step of setting up the trust.
Revocable trusts do not provide any identifiable tax benefits for most individuals. First, during a person’s lifetime a revocable trust is treated the same as the person who created it. Thus, there is no difference to the individual’s annual tax returns and consequently no savings on those taxes. Second, such trusts do not move assets outside of the individual’s taxable estate for Pennsylvania inheritance tax purposes. Finally, for those individuals worried about federal estate taxes, the revocable trust does not accomplish anything in terms of taking those assets outside of the decedent’s taxable estate.
Some revocable trusts may be disadvantageous from a tax standpoint. A common “husband and wife” revocable trust scheme, provides that the deceased spouse’s share of the revocable trust becomes irrevocable upon his or her death. This leaves the surviving spouse in a position where she has no direct access over the property and where the irrevocable portion of the trust must file a separate tax return every year.
There are an occasional situations where a revocable trust makes sense for a Pennsylvania resident. For example, in past newsletter articles we have discussed using a revocable trust to pass out-of-state real estate. Another potential user of such a trust might be the person who places high value on privacy (a revocable trust does not have to be filed locally on death; but it still needs to be filed with the Department of Revenue for Inheritance Tax purposes).
Having recognized some exceptions, we reiterate: given the relatively light burden that the Pennsylvania probate process imposes on most estates and the inescapability of the Pennsylvania inheritance tax, the inconvenience and cost of setting up and administering a revocable trust during a person’s lifetime do not outweigh the perceived benefits that those trusts may provide upon a person’s death.
If you already have a living trust or if you are considering embarking on the process of setting up a living trust, please do not hesitate to contact us. It may be that that vehicle is right for you. It is more likely that it is not. We will give you an objective overview of the pros and cons and decide whether a living trust is right for you as an estate planning tool.
– Rod Fluck