Legal | Lynn R. Emerson

Lynn R. Emerson, Esquire is the managing attorney of BusinessLegal, P.C., a law firm dedicated to the needs of small businesses and individuals. This article is published with the understanding that the information provided is of a general nature, and that the author is not rendering specific legal advice or creating an attorney-client relationship. If legal advice is required, contact BusinessLegal, P.C. or an attorney of your choice.

Revocable Living Trust - Is it Right for You?

One of the most frequently asked estate planning questions is the role revocable living trusts should play in an estate plan. Living trusts can be used to help achieve an effective estate plan. However, they can also be misused, especially when reduced to formula trusts drafted by “living trust mills”. They are neither a panacea for planning nor a Pandora’s box.

A trust creates a separate estate and involves the agreement between two persons, whereby one of them, as trustee, holds property for the benefit of the other. The primary benefits of living trusts are: avoidance of probate, effective estate tax planning, maintenance and control of assets, privacy, and more timely distribution of assets after death. Additionally, like a durable power of attorney, the living trust allows continued management of one’s estate in the event of the incapacity of the settlor (the person putting assets into the trust).

Perhaps the most familiar benefit of a living trust is the avoidance of probate. The avoidance of probate is generally assumed in most people’s minds as avoiding estate taxes and probate costs. However, avoiding the probate process does not avoid inheritance taxes on the estate. This is an all-too common misconception that has continued as the basis for the sale of many a living trust. Likewise, in Pennsylvania, where we have a fairly friendly probate code, the cost of establishing, funding and maintaining a living trust may be more expensive than the cost of probating a simple will. Another common situation arises because the trust creates a separate estate; when the settlor dies, he or she may still have property in his or her name, which necessitates the opening of a probate estate in spite of the existence of a living trust. Therefore, the costs and/or advantages of utilizing a living trust versus a simple will are highly dependent on each individual’s circumstances.

Although a living trust can be an effective planning tool in the estate planning arsenal, it can also be an expensive mistake if used improperly. The cost of creating a living trust is typically greater than the cost of drafting a will or even two wills for a couple. Often the time and expense of transferring assets or “funding” the trust can be as much as the cost to draft the document if the settlor pays for these services. Another potential area for abuse is the flip side of the benefit of privacy, which is abuse or malfeasance by a trustee. It is for this reason many settlors include an accounting provision in their trusts which, however, adds to the cost of maintaining the trust. Likewise, assets held in a living trust can sometimes interfere with asset preservation and achieving Medicaid eligibility. An additional cost is filing a tax return for the trust each year.

A simple Will is usually the most effective and lowest-cost estate planning option for the majority of individuals, and couples, drafting an estate plan. In conjunction with a Durable Power of Attorney and Living Will, these simple yet effective documents can provide the same testamentary plan as the more complex and costly Will alternative, the living trust.

In summary, living trusts can be a powerful estate planning tool in the right situation. However, they are not for everyone, and are not always the best option. One should seek the advice of a professional to determine if this tool is right for you. 

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