Do You Need a Revocable Living Trust?

Lesley M. Mehalick, J.D., LL.M

McAndrews Law Offices, P.C.

            Much confusion exists about the need for, and the purpose of, a Revocable Living Trust.  Many people are told that they need such a Trust to protect themselves and to avoid probate.   Revocable Living Trusts are complex documents that can be costly to prepare.  They are useful in a variety of very specific circumstances, but as discussed below, in Pennsylvania, Revocable Living Trusts are unnecessary in most cases.

            A Revocable Living Trust is a Trust that a person, called the Grantor, creates, funds, and retains control over during his lifetime.  Generally, it acts as a Will substitute, meaning that it directs to whom property will go when the Grantor passes.  If funded and administered correctly, the Revocable Living Trust can have several benefits; namely, it can avoid the probate process.

            Probate is the procedure used when a person passes away and a “probate estate” is opened for the decedent.  A probate fee is imposed, and several court filings are necessitated.  In some states, probate can be a long and complicated process involving court hearings and expensive fees.  In Pennsylvania and many other states, the probate process is relatively straightforward and the fees involved are generally modest.  While the Revocable Living Trust can avoid opening a probate estate, it does not avoid many steps involved in administering an estate after a person passes.  For example, regardless of whether a person created a Revocable Living Trust or a Will, creditors must be paid, tax returns must be filed, and monies must be distributed to the beneficiaries.  As the Revocable Living Trust does not obviate these steps, its utility varies depending upon the probate process of the state where the decedent resided.

            Additionally, it is essential to understand that a Revocable Living Trust only avoids probate if the Grantor titled all of his assets in the name of the Trust.  Any individually owned assets that remain titled in the Grantor’s name (that do not have a beneficiary designation) must still pass through probate.  This means that after the Trust is drafted and signed, the Grantor must re-deed his house into the Trust and re-title all of his bank accounts, stock accounts, and individually titled assets into the Trust.  If he does not transfer his accounts and assets into the Trust during his lifetime, then when the Grantor dies, those assets must still pass through the probate process in order to be distributed to the beneficiaries according to the terms of the Revocable Living Trust.

            So the question remains: if you reside in a state where probate is not unduly burdensome, do you need a Revocable Living Trust, or is a Will sufficient to meet your needs?

            In order to answer this question, it is essential to understand what a Revocable Living Trust does, and what it does not do.  First and foremost, it must be made clear that a Revocable Living Trust does not eliminate or reduce state or federal death taxes.   Specifically, it does nothing to reduce Federal Estate Tax, if the Grantor’s estate would be subject to that tax, nor does it reduce state death taxes, such as the Pennsylvania Inheritance Tax.  This is because the Grantor retains the full ability to revoke, terminate, and amend the Trust during his lifetime.   Because the Grantor retains full control over the assets in the Trust, the Trust assets are fully included in the Grantor’s estate for tax purposes.

            Although the Revocable Living Trust will not reduce the Grantor’s taxable estate, there are some circumstances where it can be very useful.  For example, if a person resides in one state but owns a vacation home in a second state, then a Revocable Living Trust can be used to own the vacation home.  By titling the vacation home in the Revocable Living Trust, the Grantor can avoid “ancillary probate,” or going through the probate process in two states.  Additionally, a Revocable Living Trust provides more privacy than the probate process, so it may be useful in cases involving a private collection that the owner does not want made public; however, a tax return must still include the value and general nature of any such property.  The Revocable Living Trust can also be used as a money management tool in a variety of circumstances and for many different reasons, such as a person with diminished capacity, a spendthrift, a person who may be subject to designing persons, or a person who does not have the desire and/or ability to manage his funds.

            It is also important to note that the Revocable Living Trust is typically a more complex document than a Will, and as such, the cost to prepare the Revocable Living Trust is generally substantially higher than the cost of a Will.   Also, even though the Trust serves as a Will substitute, a person utilizing a Revocable Living Trust should still have a “Pour-Over” Will to ensure that any assets left outside the Trust will still pour into the Trust at the Grantor’s passing.  This means that the estate plan must include more documents, and is necessarily more complex.   Lastly, in addition to the higher cost to create the Revocable Living Trust, the Grantor must take significant efforts to transfer all of his property into the Trust.

            Overall, in certain unique circumstances, a Revocable Living Trust can be an important part of an estate plan.  That being said, all relevant factors should be considered before deciding whether this type of Trust is appropriate, as the same goals can frequently be fulfilled by utilizing a more straightforward and cost-effective Will.