WHAT IS

"REVOCABLE LIVING TRUST"

AND DO YOU NEED ONE?

by: L. Robert Frme, Jr., Esquire

L. Robert Frame, Jr.

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In 1966, the well known author and lecturer - Norman F. Dacey - published a book entitled "How To Avoid Probate!" The premise of this book was that by avoiding probate, one could:

The result was that "How to Avoid Probate!" was an immediate hit. It was a large paperback book that not only explained what probate was and spelled out the ways in which it was "victimizing the country’s widows and orphans," but provided a do-it-yourself guide to probate avoidance. Within 13 weeks the book had become the Number 1 best seller. The Masters and Johnson book, Human Sexual Response, was Number 2!

Through "How to Avoid Probate!," Norman Dacey promoted Living Trusts (a.k.a. Revocable Living Trusts or Inter Vivos Trusts) as the best way to avoid probate and all of the "problems" associated with going through probate. My goal in writing this article is to review the case for and against Revocable Living Trusts for the Pennsylvania resident and to help you determine whether this estate planning vehicle is right for you. I’d also like to correct some of the misinformation which many people have heard about what these trusts can and cannot do.

I. WHAT IS A REVOCABLE LIVING TRUST?

A revocable living trust is a trust to which you transfer all or part of your estate (i.e., your assets) during your life, while retaining for as long as you live the right to the trust’s income, the right to withdraw assets from or add assets to the trust, and the right to end the trust and recover all of your assets. The person who sets up the trust (referred to as a grantor, settlor or trustor) may or may not choose to be the sole trustee or a co-trustee of the trust. The most important thing to remember about the revocable trust is that it can be revoked at any time. You can end the trust and recover assets you’ve placed into the trust or you can change the terms of the trust at any time.

When you set up a revocable trust, you should specifically reserve the right to alter or amend its terms, or terminate the trust and recover the assets, at any time. However, your death or legal incompetence will automatically make your revocable trust irrevocable which means that no one can alter, amend, revoke or terminate the trust.

II. WHAT IS PROBATE?

In spite of what you may have been led to believe by those who pander to your fear of probate to sell their probate avoidance books or to market their "custom designed trusts", the process of probate as it exists today is neither a state designed form of punishment nor a form of indirect tax. There are a number of legitimate reasons for the probate process. Knowing those reasons may help you to understand why the probate process is not necessarily something you want to avoid.

"Probate" is merely the process used by the state to prove the authenticity of a will. The most important reason for the probate is so that people who have possession of the decedent’s assets know to whom to deliver the assets. The probate process also serves to consolidate the process of settling the decedent’s estate so that conflicting claims can be sorted out in an orderly fashion. In Pennsylvania, the Orphan’s Court not only serves as a forum to resolve disputes, but also serves as a watchdog for the beneficiaries of the estate and looks over the shoulders of those who will be handling your affairs when you cannot.

Another purpose of probate is to protect the interests of creditors, and to make sure that beneficiaries cannot take assets out of the state without first paying the lawful debts of the decedent. This is also a major advantage of the probate process. Possible claims of creditors are usually cut off after a stated period following the advertisement of the probate process. Executors must usually notify known creditors directly and must notify unknown creditors by advertising the fact of the decedent’s death, typically in one legal newspaper and one local newspaper. If the creditors do not make their claims within the statutory time lime (called the "statute of limitations") they lose all rights. Without the legally required notice to debtors, the "clock"on the statute of limitations on debts may not run out for many years. Under the probate system in Pennsylvania, the statute of limitations is one year.

III. WHAT CAN A LIVING TRUST DO AND NOT DO?

A.  Will a living trust reduce or eliminate probate fees and court costs? 

Yes. Because the assets contained in a living trust do not pass through probate, these assets are not included in the decedent’s probate estate and are therefore not assessed a probate fee. How much are these fees? In Chester County, Pennsylvania an estate of $1,000.000. would be charged a fee of only $450.00! Considering the fact that a living trust may cost anywhere between $1,000.00 to $3,000.00 while a will may cost between $100.00 and $500.00, avoidance of the probate fee hardly seems cost effective. On the other hand, many state probate courts (including California) may charge as much as one and one-half percent (1½%) of the gross estate value. The same $1,000,000.00 estate in California would be charged as much as $15,000.00 in probate fees!

B.  Will a living trust eliminate the delays of probate and administration? 

Sometimes. When someone dies whose assets have been transferred into a living trust, the assets will automatically be transferred to the beneficiaries under the living trust. But, assets may still have to be sold (i.e., a primary residence); assets will still have to be held until minor beneficiaries reach the age of majority; tax returns still have to be prepared and taxes paid; and disputes between beneficiaries still have to be resolved. In Pennsylvania, the delays of probate and administration are usually caused by the executor, the attorney for the estate or a beneficiary. These delays are not caused by the probate process!

C.  Will creating a revocable living trust eliminate Federal Estate Tax, Pennsylvania Inheritance Tax or Federal or State Income Tax? 

No. Because the living trust is revocable, all of the assets in the trust will be taxable upon the death of the person who created the living trust. A Federal Estate Tax credit provision can be included in the revocable living trust to take advantage of the Federal Estate Tax lifetime exemption, but, this same provision can also be included in one’s will. Pennsylvania Inheritance Tax will be due and payable on all assets in the living trust. A revocable living trust is also "transparent" for income tax purposes during your lifetime. Any assets transferred to the trust during your lifetime will still be considered to be yours for income tax purposes. Any income earned by the trust must be reported on your personal income tax return.

D.  Will a revocable living trust insure privacy? 

No. As part of administering a probate and non-probate estate, Pennsylvania inheritance tax must be paid. The inheritance tax return must be completed and filed with the county’s register of wills within 9 months of death of the decedent. This return not only contains a detailed list of all assets contained in the living trust, but it lists the values of these assets and the beneficiaries of the trust. Many attorneys try to keep this returns private by sending them directly to the Pennsylvania Department of Revenue. However, the Department of Revenue will send the return back to the decedent’s county to be filed with the register of wills. This pretty much eliminates any privacy afforded by a revocable living trust! The entire issue of privacy may be overstated because, as a practical matter, the general public doesn’t take much interest in probate records unless the decedent was a movie star, politician or was known to be wealthy or notorious. You might therefor be disappointed to find that the disposition of your estate is not really of much interest to anyone outside of your family.

E.  Are attorney’s fees eliminated by having a living trust? 

No. As stated above, legal fees charged for preparing a living trust, moving assets into the trust and administering the trust will probably be 5 to 10 times higher than preparing a will and durable power of attorney. In addition, after the death of the Grantor of the trust, real estate deeds will need to be prepared; tax decisions and returns will need to be prepared; beneficiary disputes will need to be settled; and property will still need to be managed.

F.  Will a revocable living trust protect assets from creditors?

No. A revocable living trust and avoidance of probate can’t protect you or your beneficiaries from creditors.

G.  Will a revocable living trust shelter assets from the claims of nursing homes and the State?

No. The same principal applies here as it does with creditors. All of your assets are at risk when contained within a revocable living trust.

H.  Will a revocable living trust provide protection from disgruntled heirs? 

No. In Pennsylvania, a revocable trust will not bar the claims of potential heirs. In many cases, a trust provides no more protection than a will. Usually, the difference between challenging a will and challenging a trust is procedural Generally speaking, a revocable trust or other lifetime transfer can be contested on any of the following grounds:

1. Lack of donative capacity; or

2. Fraud; or

3. Mistake; or

4. Undue Influence; or

5. Failure to comply with formal requirements (lack of valid trust property, trustee or other element of valid trust.)

I.  If I have a living trust, do I still need a will? 

Yes. Your will is the only document which allows you to name a custodial and financial guardian for your children. A living trust controls only that property which is placed into it. All assets which are not in the living trust, i.e., your car, personal property, etc. pass according to your will. Therefore, any assets which are not re-titled into the trust pass according to your will.

J.  Can a revocable living trust be used to manage and invest assets? 

Yes. If you want to relieve yourself of the burden of managing or investing stocks, bonds, real estate, or other assets the living trust may be a good solution. You may be too busy to pay bills, file tax returns or keep complicated records and may want or need to turn this job over to the trustee of your living trust. Perhaps you are entering public office and would like to avoid any appearance of a conflict of interest regarding investments. Or you may have recently inherited a large sum of money or assets requiring considerable time or special expertise to manage. A corporate or other professional trustee may be a viable solution. If you are traveling out of the country and need someone to make investment decisions for you while you are gone a trust may be the way to go. You may be willing and able to control all management and investment decisions, but you may be worried that your beneficiaries don’t have the experience, inclination, time or the legal, mental or emotional capacity to handle these responsibilities. In Pennsylvania, gifts to minors (under the age of 18) and to mental incompetents can fall into this category. But setting up and funding a trust while you are alive, rather than waiting until you die or become disabled, you can give yourself the opportunity for a "trial run."

IV. CONCLUSION

From my point of view, revocable living trusts do have advantages to certain people in certain situations. If your goal is to manage assets for a disabled beneficiary or to make sure that a certain beneficiary receives a specific asset outside of probate, then a revocable living trust may be an excellent estate planning tool for you. But, the long held belief that living trusts can eliminate probate fees, save taxes, insure privacy, eliminate attorneys and shelter assets from creditors, nursing homes and disgruntled heirs is just plain WRONG! Most of this misinformation has been promoted by sales people trying to make a quick buck by selling trust packages "door to door" and by newspaper articles from states where revocable living trusts are much more practical then here in Pennsylvania. In my opinion, very few Pennsylvania residents should have revocable living trusts. 

An excellent book which goes into great detail on this subject is The New Book of Trusts published by Leimberg Associates, Inc. Call (610) 527-5216 to order your copy.