A trust is a legal entity, or it is sometimes referred to as a legal arrangement, in which one person (the grantor) transfers ownership of assets to another person (the trustee, or a co-trustee if there are multiple) to hold and manage for the benefit of a third person (the beneficiary). Trusts can be used for a variety of purposes, including protecting assets, minimizing taxes, and ensuring that assets are distributed according to the grantor's wishes.
A revocable living trust is a few things - it's an estate planning tool, a legal document, and a type of trust that can be amended or revoked by the person who created it (you, the grantor) at any time. This means that the grantor has complete control over the trust and can make changes to it as they see fit. The grantor can also act as the trustee of the trust (the legal owner of trust property), which means they have the authority to manage the trust's assets and make decisions about how those assets are used.
As mentioned above, a revocable living trust is part of a person's estate plan, which typically consists of a will, power of attorney, and an advance health care directive (sometimes referred to as a living will). Creating a revocable living trust does not alter the need for those core estate planning documents - you still need them. So, the question for you is whether, in additional to those documents, you should create a revocable living trust.
We will explore this topic generally (that is, for people living in any US jurisdiction - though you should always consult an attorney licensed in your jurisdiction before acting on any general information) and then include specific notes for people living in Pennsylvania.
An irrevocable trust, as opposed to a revocable trust, cannot be amended or revoked (with some limited exceptions) once it has been created. This means that the grantor gives up control over the trust and its assets, and cannot make any changes to the trust once it has been established.
Irrevocable trusts can better protect assets held by the trust, and if done correctly they can potentially reduce the taxable estate and avoid estate tax (federal), however for most people and for reasons outside the scope of this article, they are usually not the best choice for basic estate planning, mostly because they do not allow you to maintain control of trust assets.
So, for the purpose of this article, we will discuss the use of revocable trusts. Although revocable trusts don't help you avoid taxes, they are much more flexible than irrevocable trusts because you retain full control to remove assets from the trust and they can be amended or revoked, and you are not restricted from making improvements during your lifetime.
They have a number of potential benefits, but most people create revocable living trusts so that their loved ones can avoid the probate process. So, to understand whether you should have one, we need to know a little bit about what the probate process entails and why people often try to avoid probate.
Probate is the legal process of distributing a person's assets after they die. It involves proving the validity of the person's last will and testament (if there is one), identifying and inventorying the person's assets, paying their debts and taxes, and distributing the remaining assets to the beneficiaries named in the will.
Probate is typically overseen by a court and requires the appointment of a personal representative (also known as an executor or administrator) to manage the deceased person's estate. The personal representative is responsible for carrying out the terms of the will and ensuring that the deceased person's debts and taxes are paid. This is the source of some confusion about revocable living trusts because the probate process, and how difficult or easy it is, varies from state to state.
In most states, probate is a lengthy and costly process, as it is a court-supervised process that involves going to court and hiring an attorney to represent the estate. It can also be a time-consuming process, as it can take several months or even years to complete, and in many states requires one to interact with probate court.
One of the main advantages of avoiding probate is that it can save time and money, as it allows assets to pass to beneficiaries without the need for court involvement. There are several ways to avoid probate, including using a living trust, using joint ownership, and using beneficiary designations.
Going out of the way to avoid the probate process for a decedent who, when they passed, lived in Pennsylvania is a different story. In PA, it makes sense to separate two related concepts: probate (the specific legal requirements of opening the estate, filing certain things with the Register of Wills, and closing out the process) and estate administration, the larger process that encompasses all steps that loved-ones have to go through after someone dies.
In PA, the steps listed here are the only steps that a revocable living trust, if used properly, will allow the deceased person's loved-ones to avoid. It includes the following, which people will often hire an estate attorney to assist with:
Opening the estate with the Register of Wills in the county the decedent lived in when they died. There are court costs and filing fees associated with this which vary based on county.
Filing the estate information sheet (a one-page sheet - very easy)
Filing the inventory with the Register of Wills (a one-page sheet - very easy)
Filing the status report indicating that estate administration is complete
As you can see, this list is short, so using a revocable living trust has limited benefits in PA.
Estate administration is a better term for what really matters to you - the process that you have to go through after your loved one dies, and it includes all of the steps mentioned above, plus many others that are beyond the scope of this article including (but not limited to):
Notifying potential interested parties
Paying all the decedent's debts and expenses
Filing and paying PA Inheritance Tax
Drafting and executing a family settlement agreement
Distributing the estate
This is the real work of administering the estate, and in PA, it must be done whether or not a revocable living trust is used.
Even the benefits listed above (and those listed below) are subject to the following unavoidable limitation that is often overlooked: Those benefits are only realized for the assets held in the trust. That is, to use a revocable living trust properly, ALL of your personal property must be retitled in the name of the trust. Here are some examples regarding certain assets:
You need to go to the bank or engage in whatever procedure the bank uses to transfer the account from your name personally (Jane Doe) into the name of the trustee or successor trustee of the revocable trust (Jane Doe, Trustee of the Jane Doe Revocable Living Trust).
You need to have an attorney draft a new deed (in PA, it would likely be a "quitclaim" deed) transferring ownership of the real property from your name personally (Jane Doe) into the name of the trustee of your revocable living trust (Jane Doe, Trustee of the Jane Doe Revocable Living Trust). Then, the new deed and all other required documentation need to be recorded at the Recorder of Deeds for the county the property is located in.
PA and Philadelphia County have a transfer tax that applies to the transfer of real property from one entity to another. Normally, this can be avoided when transferring property between family members, and sometimes into a trust. However, the rules regarding transfer tax when it comes to transferring property into a trust can catch people by surprise. There is a lot of detail here, but in short, ALL possible beneficiaries of the revocable living trust must be family members for whom no transfer tax would apply if they received the property directly. Otherwise, transfer tax can apply, and it's significant (1% for PA plus 3.27% if the property is located in Philadelphia County). So, you really don't want to trigger transfer tax when transferring your assets into a revocable living trust, but sometimes it happens unexpectedly - and worse, after you have already spent the money to create the trust in the first place. So, if you have decided to create a revocable living trust, it's best to foresee and plan for this ahead of time.
Vehicles, and anything with a physical, paper title, need to be transferred into the name of of the trustee of your living trust. This typically involves dealing with the relevant state institution that deals with licensing, titling and transportation (i.e. the Department of Motor Vehicles in Pennsylvania).
These can be a bit complex. If you are a business owner operating a business other than a sole proprietorship, you may want to speak with an estate lawyer or a business attorney to determine how to plan your business succession strategy.
Brokerage accounts, annuities, life insurance, retirement accounts, and anything similar typically have beneficiary designations. That is, you designated beneficiaries when you set them up, and those beneficiaries will receive those accounts (or their proceeds) when you die. It is less crucial for these to be retitled into the name of your revocable living trust (and for some types of accounts, like retirement accounts, you can't), because unlike bank accounts and real property, they would not otherwise need to be probated anyway (because they go directly to the listed beneficiaries).
This process of retitling personal assets into the living trust is often overlooked, and without it, there is no point to creating the revocable living trust, because it does not own anything! For assets that are left in your own name like this, probate is required to transfer those assets in accordance with the wishes laid out in your will. And since you have a revocable living trust, your will is called a pour over will because, typically, all it does it "pour" the assets you forgot about into the trust.
Despite these limitations, there are other benefits to using a revocable living trust:
A revocable living trust allows the grantor to retain control over the trust and its assets, and to make changes to the trust as needed. This can be useful if the grantor's circumstances change (such as if they get married or divorced) or if they want to make changes to the trust's terms. That said, the same flexibility (or, arguably more) exists without the use of a revocable trust through the use of a traditional will.
A revocable living trust can simplify the management of the grantor's assets by allowing a single person (the trustee) to manage and distribute the assets according to the terms of the trust. This can be especially useful if the grantor becomes incapacitated or is unable to manage their assets on their own.
Probate is typically understood as a public process. In many jurisdictions, a revocable living trust can help maintain the privacy of the grantor's assets and financial affairs, as the terms of the trust do not need to be disclosed in court. This can be a significant advantage compared to a will, because many people object to a public probate process, and probate filings typically become a matter of public record. In PA, however, the revocable living trust must be attached to the PA Inheritance Tax return, meaning that it becomes public anyway, so this advantage is usually moot in PA.
A revocable living trust allows the grantor to specify how their assets should be managed and distributed after their death, which can provide financial security and stability for loved ones and minor children. Most of the advantage here can be realized through the use of a traditional will, however, though a trust does allow you to say when and in what amounts assets are distributed to beneficiaries (for example, 1/3 at age 25, 1/3 at 30, and 1/3 at 35). A will, on its own, cannot accomplish this (unless it creates a testamentary trust at the time of your death, which isn't difficult and often makes sense, but is outside the scope of this article).
Not really. Because the trust can be amended or revoked at any time, the law permits any entity interested in counting your assets, such as taxing authorities like federal or state governments, to count what is in the revocable living trust. Therefore, in PA, anything passing through the trust is part of the taxable estate for PA Inheritance Tax purposes, and for the purposes of calculating federal estate taxes.
PA Inheritance Tax applies to the net estate, which is the gross estate minus all of the estate's debts and expenses. It is a peculiar feature of PA law, and unfortunately one that all of the deceased person's loved ones need to grapple with. However, for the reasons above, (that is, the fact that revocable living trusts can be revoked during the grantor's lifetime) the value of everything in the trust is part of the taxable gross estate.
Most people don't have to worry about federal gift and estate tax because, during their lifetime, every person can gift $12.92 million (in 2023). Nevertheless, even if federal gift and estate tax would apply to your estate, a revocable living trust would not assist in reducing your tax burden. There are strategies that might, however they are outside the scope of this article.
For federal income tax purposes, revocable living trusts are generally treated as pass-through entities, meaning that the trust itself does not pay income taxes. Instead, the income generated from trust assets is passed through to the grantor (the person who created the trust) and are taxed on the grantor's personal income tax return.
This means that the grantor is responsible for paying any income taxes on the trust's income, as well as any capital gains taxes on any sale of trust assets. The trust's income and deductions are reported on the grantor's personal tax return (Form 1040) and are taxed at the grantor's individual tax rate.
It is important to note that if the trust has a separate tax identification number (TIN) and files its own tax return (Form 1041), the trust may be required to pay taxes on any income that is not distributed to the grantor. This is known as undistributed trust income and is taxed at the trust's tax rate, which can be higher than the grantor's individual tax rate.
So, in conclusion, should you create a revocable living trust? There is a lot of advice out there directing you to do so, however (especially for those living in Pennsylvania), the time, effort and energy that goes into creating one can easily outweigh the benefits. For that reason, I will often gently guide clients away from thinking that they need one. However, if you want to make things as easy as possible on your loved ones after you die, regardless of cost and work involved for you, a revocable living trust can make sense as part of a careful estate planning strategy.
If you live in PA and would like to discuss this topic or any other related to estate planning or probate, please contact me to set up a free consultation. If you live in another jurisdiction, contact a a local estate planning attorney or an estate lawyer who is licensed in your state.
I hope this was helpful, and thanks for reading!
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Whether you want to avoid potential probate or you are struggling with the probate process, the attorneys at Chestnut Hill Legal can assist you. Our lawyer for probate can help you determine your best options to protect your assets from probate, fulfill all off your duties if you are named as an executor of an estate, or understand your rights as an heir or beneficiary under Pennsylvania state law.
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