Paul Cohen, Curtin & Heefner

Revocable living trusts have earned a mixed reputation. Many believe they are an essential part of any estate plan, while others view them as unnecessary and burdensome.

The most commonly cited benefit of a revocable living trust is the avoidance of probate—allowing assets to circumvent a decedent's estate and pass to beneficiaries directly through the trust. In states such as California and Florida, where the probate process is notoriously complex and costly, revocable living trusts are ubiquitous. But in Pennsylvania, where the probate process is relatively simple, revocable living trusts are often used for the same reason. But is it worth it?

If a decedent's estate is not administered, and all assets pass through a revocable living trust, there are still statutory obligations to advertise and provide notice. A Pennsylvania Inheritance tax return will likely need to be filed. And the trustee will still need to account to and obtain a release from all beneficiaries. More often than not, probate is required—even in the rare circumstance where a trust is fully funded—to handle some overlooked account, refund check or reimbursement that can only pass through a decedent's estate.

Given the general lack of judicial oversight and the expediency of estate administration in Pennsylvania, probate avoidance alone is not a good enough reason to use a revocable living trust. But that is not to say that a revocable living trust should never be used. There are situations where the benefit is undeniable and should be considered.

Probate Avoidance for Extraordinary Situations

While probate avoidance alone is not typically a good enough reason to implement a Revocable Living Trust in Pennsylvania, there are extraordinary situations, where it may be advisable.

If the client is a public figure with a desire to keep his or her affairs private, a trust may accomplish this purpose. Unlike a will subject to probate, a revocable living trust is not filed with the register of wills and does not become a public record. The specific terms of the trust may remain unknown to anyone other than the trustee and beneficiaries of the trust.

If the client has a very high net worth, use of a trust may be advisable to avoid what could be a substantial probate fee. In Bucks County, for example, the probate fee on a $10 million estate would be about $15,000. Moving some or all of those assets into a revocable living trust would reduce or eliminate the fee.

Maintaining a Family Legacy

When planning for spouses with children in common, Wills are often mirror image “I Love You” Wills.  As the spouses' assets are likely held in joint names, the effective purpose of their Wills is to provide for the disposition of the estate to the children after the death of the surviving spouse. However, what if one of the spouses received a substantial inheritance that he or she wants to pass directly to the children? A revocable living trust is a good option in this case. The spouse with the inheritance can hold the funds in a separate trust with customized provisions to ensure that the inheritance passes to the children.

A revocable living trust serves several purposes in this case. The inherited assets are segregated in a separate account during life, allowing the inheritance to be accounted for and tracked (which is also beneficial in the event of a subsequent divorce). The separate trust allows the spouses to maintain simple “I Love You” wills without regard to the inherited assets. And there is no need to go through probate on the first death if all other assets pass by operation of law to the surviving spouse.

Out-of-State Properties

One of the most common uses for a revocable living trust is to hold out-of-state property. By transferring such property to a trust, the need for ancillary probate may be avoided. Depending upon the location of the property, this could result in substantial savings.

Before pursuing this plan, you need to look to the laws and practice of the other state by consulting local counsel. You should first evaluate whether there will be any real benefit. For example, if the client lives in Pennsylvania and the real estate is located in New Jersey, a trust is probably not necessary as all that would be required is filing of an exemplified copy of the probate proceedings in the appropriate New Jersey County Clerk's office. You then need to determine the costs to be incurred, such as the retention of local counsel and whether there are any transfer taxes. Finally, you have to look at potential unintended consequences. If the property is held by spouses, you should determine whether a transfer into a trust would impact creditor protection otherwise available for entireties property.

Allow Lifetime Management of Assets

When considering options that would allow a client to arrange for his or her future incapacity, we often look to powers of attorney. A properly executed POA could give an agent the power to do practically everything needed for the principal. But sometimes, a POA is not enough. While it will give an agent authority, that authority is not exclusive of the principal and is subject to immediate revocation.

A properly crafted revocable living trust could allow a client to give broad authority to a friend, family member or institution, effectively taking exclusive control of assets, protecting the client from himself. In this case, you may want to consider an irrevocable trust, so that the client cannot undo what was done for his protection. But many clients are wary of the permanence of an irrevocable trust. If this is the case, a revocable living trust could contain safeguards, such as providing for a delayed effective date of any revocation. This would allow a trustee to protect a client for a period of time—and perhaps consider other options—even after the client has revoked the trust.

There are other situations—beyond the scope of this article—that may call for use of a revocable living trust. These circumstances include the use of a trust to receive IRA benefits (especially where a plan administrator does not provide a means to name a testamentary trust as beneficiary) or to establish a third party special needs trust. In each of these situations, a revocable living trust may be a better alternative than a testamentary trust incorporated into a last will and testament.

When considering a revocable living trust, it is important that clients understand what it does not do. A revocable living trust has no tax benefits as income will be treated as the grantor's for tax purposes and all trust assets will be includable in the grantor's estate for estate and inheritance tax purposes. Assets in a revocable living trust will be considered an available resource if the grantor applies for medical assistance. A revocable living trust offers no protection from creditors. And a revocable living trust is not immune from challenge by disgruntled heirs.

Clients should also be aware of the costs. Typically, there will be an additional cost on the front end for the drafting of the trust and costs associated with funding the trust, especially if real estate is involved. And as the client's estate plan evolves over time, the trust will have to be revised or updated to keep pace with those changes.

Finally—and perhaps most importantly—clients and planners both need to be aware that the implementation of a revocable living trust does not end when the trust is executed. It is often the case that a trust does not get funded as anticipated, thereby eliminating the benefit it was meant to serve. It is important to follow up to ensure that the assets intended to be held in trust are actually held in trust. This may be as simple as re-titling a bank account or as complex as getting local counsel to transfer real estate. But it has to be done.

Revocable living trusts can be a useful tool used in crafting a good estate plan. An effective estate planner must know both when to use such trusts and how to use them effectively.

 

Paul R. Cohen is a partner with the law firm of Curtin & Heefner in Yardley, where he serves as chair of the firm's estates, trusts and tax department. He represents clients in Pennsylvania and New Jersey, providing a personalized approach to ensure that each client receives a customized plan to effectuate his or her distribution goals.