What Is A Revocable Living Trust?

A revocable living trust is a trust that you create during your lifetime and contribute most of your assets into.  During your lifetime, you can change the trust terms much the same way you can change your will, and you can add more assets or withdraw assets from the trust at your discretion.  Upon your death, the trust becomes irrevocable and a new, or successor, trustee steps in to administer the trust.

Often, clients come to our office with preconceived notions about revocable living trusts. Common questions we receive are “Does a living trust avoid probate?” and “Will a revocable living trust reduce my estate’s inheritance tax liability?” Unfortunately, there are many misconceptions about revocable living trusts and their necessity in estate planning.

5 Misconceptions About Revocable Living Trusts

Misconception #1: A revocable living trust will provide tax savings to my estate.

A revocable living trust does not reduce a decedent’s estate or inheritance tax exposure. All assets held in a revocable living trust are subject to income and estate taxes, and must be reported on the appropriate tax returns.

Misconception #2: A revocable living trust will provide administrative cost savings by avoiding probate.

In order to avoid probate, and in addition to forming the revocable living trust, you must place assets into the revocable living trust. This means deeding your real estate (and possibly paying transfer tax) and moving your bank accounts into the revocable living trust. You must also update your beneficiary designations on any life insurance policies, annuities, and qualified plans. The process to fund the revocable living trust may be costly in comparison to the probate fees your estate will owe. In Pennsylvania, probate fees are relatively low and are not a major consideration in deciding to prepare a revocable living trust.

Misconception #3: A revocable living trust will shelter my assets from creditors.

A revocable living trust does not protect your assets from creditors during your lifetime or at your death. Rather, since a revocable living trust can be revoked during your lifetime, a creditor is able to take the assets even if they are in the trust.

Misconception #4: A revocable living trust will provide privacy concerning my financial affairs.

While assets in a revocable living trust are not part of the probate estate, such assets must still be reported on the estate’s inheritance tax return, which is a matter of public record.

Misconception #5: I do not need a will if I have a revocable living trust.

A revocable living trust eliminates the need for a will only if every asset you own has been transferred to the revocable living trust or was given away during your lifetime.

 

Benefits Of A Revocable Living Trust 

A revocable living trust may be beneficial in the following situations: 

1. You live in a state with high probate fees.
   Assets held in a revocable living trust avoid probate.
2. You have real property in multiple states.

A revocable living trust can help you avoid ancillary probate. Ancillary probate is a subsequent probate proceeding required in another state than the original probate proceeding. Ancillary probate is required where the decedent left property in more than one state.

3. You become incapacitated.

A revocable living trust can contain a provision appointing a successor trustee if you become incapacitated during your lifetime. Upon your incapacitation, the successor trustee would immediately transition into the management of the assets in the revocable living trust.

4. You become elderly and require financial assistance.

A revocable living trust allows your family to provide you with financial assistance, but allows you to control assets when you do not yet wish to turn over all control. You may name a trusted individual as “co-trustee” with the right to act independently, but you may retain the right to act alone.

5. You believe there is a chance of a will contest in your estate.

If there is a chance of a will contest in your estate, a revocable living trust can reduce risk. By setting up and funding a revocable living trust during your lifetime, you created evidence that you knew what you wanted to do and that the revocable living trust sets forth that intention.

If you have any questions about this or any other estate planning issue, please contact Grace C. Nguyen Bond at gcnb@blakingerthomas.com or (717) 509-7226, or Trisha Lantz at tl@blakingerthomas.com or (717) 509-7210.

*This article is provided for information purposes only and should not be construed as legal advice or as creating an attorney-client relationship where one does not already exist.*