The revocable (so-called “living”) trust affords another option for the transfer of assets upon death. There are several pros and cons to using a trust rather than a will as your primary estate planning document. A revocable trust can act as a will substitute and in many cases can avoid the need for probating your estate. Much has been written recently on the use of trusts to avoid probate. Further, banks, brokers and other financial institutions (as well as some attorneys) aggressively promote revocable trusts.
A revocable trust is essentially an agreement between you — sometimes called the “grantor,” “trustor,” or “settlor” — and one or more other persons called the “trustee(s).”
The primary reason given for the use of revocable / living trusts is to save the cost, delay and publicity of probate. You might be able to eliminate some of the time spent by the attorney and the personal representative / executor in administering the probate estate, but probate is fairly simple in Washington, D.C., Maryland and Virginia. By using a revocable / living trust, a trustee holds or receives title to all of your trust property at the time of your death, thereby obviating the need for a court to assist in the transfer of property governed by a will. But many people forget to transfer their assets into their new revocable / living trust and, therefore, this aspect of probate avoidance only works if ownership of the assets is transferred prior to death.
Of course, there is some additional expense involved in the preparation of the trust document and the transfer of all of your property to the revocable / living trust. Actual deeds, assignments, transfer documents, etc. should be prepared to give the trustee title to all of the assets prior to your death. In addition, revocable / living trusts require some very minimal on-going maintenance to ensure that all future assets are transferred to the trust. If an asset is overlooked — i.e., not owned by the trustee and/or fails to name the trustee as beneficiary — a probate proceeding still may be required. It is this risk that causes careful practitioners to recommend a “pour-over” will to complement the trust. A pour-over will provides that any assets passing through probate are to be distributed or “poured over” into the trust for ultimate disposition.
Although the expense involved in dealing with the court can be reduced or eliminated, the revocable / living trust does not avoid the obligation to file a federal estate tax return and any required state death tax returns. The cost involved in preparing and filing these tax returns represents, in many cases, the greatest cost in the resolution of an estate. As discussed below, the executor or trustee must identify all of the assets owned by the decedent, including real or personal property (such as cars, stock, bank accounts, certificates of deposit, etc.), however owned, on the tax returns using their fair market values as of the decedent’s date of death (or in some cases, as of six months after death). In many cases, appraisals are required to establish these values. If there is no executor appointed, the trustee of the revocable / living trust must see that the necessary tax returns are timely prepared and filed. A trustee of a revocable / living trust may have an advantage over an executor in this process since the trustee presumably already holds title to all of the decedent’s property, thereby being in a better position to know the decedent’s property and its value. This is not always the case, however, since frequently the decedent was the trustee right up to the time of his or her death.
The revocable / living trust can also (but does not always) avoid some of the delay involved in the probate process attributable to the more cumbersome involvement of court administration. The average estate takes 12-16 months to fully administer. However, where a federal or state estate tax return is required, the revocable / living trust may offer no advantage to a will in accelerating the settlement of an estate. This is because the trustee will want to (and indeed should) wait to make substantial distributions until after the IRS or the state taxing authority has issued a final closing letter indicating that the proper amount of tax has been paid and that any lien of the IRS on the decedent’s assets is released.
It used to be advantageous to utilize a revocable / living trust to avoid the disclosure of the amount, value, and disposition of your property. Whereas this is still the case with respect to the general public, the privacy benefit is no longer the case with respect to the beneficiaries of your estate after your death. Today, Maryland, D.C. and Virginia laws all provide, with minor differences, that beneficiaries of a trust are entitled to notice of the existence of the trust after your death and also of their right to request a copy of the trust instrument. Probate administration is a matter of public record, meaning that any person is free to examine all of the papers filed with the court and attend the hearings held at the various stages of the probate process. That is not the case with a revocable / living trust even though portions of the trust must be filed with the court; the provisions of the trust are not available to the general public. Of course, if a revocable / living trust is contested, this veil of secrecy will be lost in the ongoing judicial proceeding.
Perhaps, one of the most practical reasons for having a revocable / living trust is to provide for the possibility of your disability. If all of your property is held in a revocable / living trust and you become disabled, a successor trustee (whom you have named to be appointed in the trust document) can step in and manage your property for your benefit in accordance with the terms of your trust. This avoids, in most cases, the need to have a conservator or guardian of the property appointed by the court to manage your affairs. While most states provide for durable powers of attorney — which is a much less costly alternative to a revocable / living trust used for this purpose — many title companies, banks, and other institutions are reluctant to accept durable powers of attorney, especially those that only become effective upon the person’s disability. Unlike the revocable / living trust, the durable power of attorney ceases to be effective upon your death. Again, many practitioners recommend a durable power of attorney even if a revocable / living trust is used. The power of attorney is much broader in its application since the trustee of the revocable / living trust is limited in authority to the assets held in the trust. For example, your trustee would not be able to file personal income tax returns for you (as revocable / living trusts are not required to file a separate tax return during the grantor’s lifetime), settle claims not involving trust assets, etc.
If there is property in numerous states that would otherwise be subject to probate, the revocable / living trust’s probate avoidance benefits are magnified. For instance, if you were to own real estate in several states, there would generally need to be some type of court proceeding in each state. If the property is transferred to a revocable / living trust, the necessity for probate in these multiple jurisdictions is avoided.
The revocable / living trust should be considered to provide for coordination of your affairs if you should become disabled and to handle the distribution of assets following death. Although there are circumstances when a revocable trust is not warranted or desired, revocable trusts have become the preferred estate planning instrument among a high percentage of estate planning attorneys and their clients, particularly where the clients are elderly, suffering from a possibly debilitating illness or own property in more than one jurisdiction.
If you are considering whether a revocable trust is right for your particular situation, I welcome you to contact me to discuss how the above advantages and disadvantages might apply to you.