Revocable Living Trusts: Are They Worth the Hype?
In many states, the use of a Revocable Living Trust has become increasingly popular as a viable estate planning option. But in Maryland, the ease of the probate process, among many other reasons, makes this option usually not worth the hype, money or time.
A Revocable Living Trust is a written document that contains provisions of how to hold, manage, and distribute property during your life and after your death. It is revocable, meaning that even though assets are transferred (or re-titled) to the living trust, the person who creates the trust, the grantor, can get his or her property back by revoking the Trust during his or her lifetime. The persons who manages the assets in the Trust is the Trustee and this is almost always the grantor during his or her lifetime. The primary purpose of a Revocable Living Trust is to avoid probate. It is most popular in states with probate systems which are expensive and time consuming.
In Maryland, the advantages of having a Revocable Living Trust are typically outweighed by other estate planning alternatives and the ease of the Maryland probate system. After a person’s death and once the probate documents are filed in Maryland, a personal representative can be appointed within days and the Letters of Administration can be used to access funds and manage probate assets. In addition, the costs associated with probating an estate are modest with probate fees depending on the size of the probate estate. For example, an estate of $200,000 would have a probate fee of$400.00. Unless there is some complicating matter, many estates can be closed after 6 months which is the period that creditors have to make claims against the estate.
Despite the ease of the Maryland probate process, many who have heard of the evils of probate will still insist on a Revocable Living Trust, and for them, the following information should assist them with making an informed decision.
- Avoiding Probate
Upon your death, assets that were titled in the Revocable Living Trust pass directly to the Trust without going through probate. This is particularly important if you own real estate in more than one state because without a trust, your loved ones would have to open a probate estate in each state real property is located. In addition, a Revocable Living Trust allows immediate access to bank accounts titled in the Trust after your passing, instead of waiting for the documentation from the probate estate to gain access to the account(s). Lastly, the decedent’s affairs could theoretically be finalized in weeks or months as there is no 6 month creditor claims period. Note that this may in fact also be construed as a disadvantage because creditors may have three years to file a claim against assets that were in the trust.
- Management of Assets
Should you become ill or incapacitated, some argue that it is easier to manage Trust accounts versus accounts in your individual name. If your assets are held in a trust account and you become incapacitated, the Trust document outlines the Trustee’s power with regard to managing your assets. Financial institutions will require your trustee to provide a copy of the Trust Agreement.
For accounts held in your individual name, a properly executed Power of Attorney will allow your agent to control those assets. Although recent changes in the Maryland law regarding Powers of Attorney should make it easier to use a Power of Attorney, some may still find it difficult to use POAs with certain financial institutions.
Unlike a Last Will and Testament, upon your death a Revocable Living Trust is not public record. Therefore, information as to what you owned and how you dispose of those assets are private. Thus, your beneficiaries and the amounts they receive are not available for public scrutiny.
- Avoiding Multi State Probate
The most compelling reason for a Revocable Living Trust is to avoid probate in multiple states if you own real estate outside of your home state. In this instance, your Last Will and Testament must generally be probated in your home state and the state for which you own real property, a process which is called “Ancillary Probate.” If your real property is titled in your Living Trust, this will not be necessary. Your real property can be distributed by your Trustee, upon death, no matter where it is located.
- A Last Will and Testament is Necessary
Invariably, not all of the assets will have been re-titled in the name of the Revocable Living Trust before death. There will be a bank account or vehicle that was still in the decedent’s name at the time of death. Thus, a Will is still necessary. Most attorneys will draft a special type of Last Will and Testament called a Pour Over Will to ensure that any unfunded assets (assets not re-titled) will “pour” into your trust. To do this, your Pour Over Will must also be probated, and such assets may then be distributed according to the instructions in the Trust.
- Initial Expense is High
It is more expensive to create a Revocable Living Trust than a Last Will and Testament. Preliminarily, there is the initial cost of drafting a Trust Agreement, which is usually more than the price for drafting a Will. There is also the expense of “funding” the Revocable Living Trust. This is the process of transferring the ownership of every eligible asset into the name of the Trust. In addition to just the time spent on this process there may be costs associated with retitling assets. For example, real property can only be assigned to a trust by deed, which must be recorded at the applicable office of land records for a fee. This fee includes the time and cost for the attorney or titling company to draft the deed and the fees to record the deed.
- Funding a Trust Takes Time and Effort
Once your Revocable Living Trust becomes effective, you must fund the Trust by contacting financial institutions, life insurance companies, and transfer agents to change account ownership and beneficiary designations; retitle vehicles, and sign and record new deeds for real estate. There is a significant cost – in terms of time – to accomplish this. If you fail to re-title, even one asset of any significance, your trustee, upon your death, would have to open an estate to administer such assets. This would defeat the purpose of the Living Trust.
- Cannot Avoid Tax
Although assets that are retitled to the Trust avoid probate, they are still subject to income and estate taxes. This is because the IRS still considers that all the assets in the Revocable Living Trust are still yours. This should not be surprising as you are the trustee of the trust, the beneficiary of the trust, and can revoke it at any time. Because it is still considered your money, you and/or your estate are still responsible for income, estate, and inheritance taxes. There is simply no tax advantage to having a Revocable Living Trust over a Last Will and Testament.
The next time you hear someone tell you that a Revocable Living Trust is a must, please consider all of the pros and cons as they specifically apply to your situation. While there are cases where a Revocable Living Trust can be beneficial, for most Maryland residents there are other legal avenues to accomplish your goals without the cost and effort of a Revocable Living Trust.