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Revocable Trusts and Living Trusts

Before we get into the nuts and bolts of revocable trusts and living trusts, we need to first understand the terminology:

Trust: A legal document that describes the processes and procedures where a settlor or grantor transfers his or her assets to a trustee, who manages the assets on behalf of a beneficiary. Trusts can be either revocable/living trusts or irrevocable trusts. Here, we are only discussing revocable trusts and living trusts.

Settlor or Grantor: The individual who establishes the trust or transfers property to a trust.

Trustee: A person or corporation who manages a trust for the benefit of a third person, the beneficiary, pursuant to the terms of the trust.

Beneficiary: A person who receives assets from a trust.

A revocable trust or living trust is an estate planning device used so that your assets are placed into the name of the trust for your benefit during your lifetime then transferred upon your death to your beneficiaries. Unlike a will, a revocable trust or living trust can dictate specific circumstances as to when the assets are to be distributed to the beneficiaries (such as obtaining a college degree). "Revocable trusts" and "living trusts" are the same thing, some refer to them as "revocable" because the trust can be amended or rescinded at any time by the grantor during his or her lifetime and some refer to them as "living" because the trust is establishing during the grantor's lifetime.

Revocable trusts or living trusts certainly have advantages and are appropriate under some circumstances, but often times a revocable trust or living trust is unnecessary because of the myths surrounding revocable trusts and living trusts (described in more detail below).

Advantages to a Revocable Trust or Living Trust:

(1) The trust is established during the grantor's lifetime and may be revoked, altered or amended at any point during the grantor's life. This allows for flexible control over assets so life changes can easily be accommodated.

(2) A trust is administered privately, outside of the probate process. This means that your assets are not filed at the courthouse and no one from the public can view the assets you left to your beneficiaries.

(3) Since the trust is the owner of the assets, investments may be continued without interruption upon the death of the grantor. The beneficiaries may wish to leave the investments where they are or invest elsewhere. In the probate process, they may have less choices.

(4) The grantor can retain control over the assets after death. For example, a grantor can set up the revocable trust or living trust in a way that the beneficiaries can only receive a limited sum of money per year or the beneficiaries must successfully earn a college degree before any monies are distributed to them.

Disadvantages to a Revocable Trust or Living Trust:

(1) A will is still necessary. A pour over will is required if you have a trust. This is required for two reasons: (i) a trust cannot appoint a guardian for minor children like a will and (ii) anything not owned by the trust is owned by the grantor and will be subject to probate. A trust is not a replacement or substitute for a will.

(2) The legal costs associated with establishing a revocable trust or living trust are often substantially higher than having only a will.

(3) Revocable trusts and living trusts require proper bookkeeping and titling of assets to be effective.

Revocable Trust or Living Trust Myths and Misunderstandings:

(1) Revocable trusts and living trusts reduce taxes. This is often the number one reason individuals decide to incorporate a revocable trust or living trust into their estate plan. The inheritance tax in Maryland is 0% for direct lineal descendants (children, grandchildren, etc..). Estate taxes do not become an issue until a married couple has approximately $11,000,000 in assets. Using a trust to avoid a 0% tax is often unnecessary.

(2) Probate has to be avoided. Probate is the process of administering a will through the courts. Often times probate is avoided for privacy reasons, avoiding the probate fees at the courthouse and avoiding attorney's fees for probating the estate. I will discuss the later two points below, but trusts only provide privacy in that the actual assets are not filed at the courthouse. Banks and financial institutions often want a copy of the trust for their files.

(3) Attorney's fees and filing fees are substantially reduced with a revocable trust or a living trust. Attorney's fees in probate are capped by statute (Maryland Rule 6-416). This means that the legal fees for probating a will can only go so high, regardless of how complicated the matter is. With a trust, however, there is no such protection (remember, a trust is a private document) and legal fees are not capped by statute in the event of a dispute. As far as the filing fees at the Register of Wills go, an estate of up to $50,000 is $150 in filing fees and an estate up to $1,000,000 is $1,000 in filing fees.

(4) Creditors can be avoided with a revocable trust or a living trust. Revocable trusts and living trusts do not provide for creditor protection. The "spendthrift" provision of a trust that allows the trust's assets to go to a beneficiary without being subject to the beneficiary's creditor's claims can also be used in a will. A revocable trust or living trust can provide only the same level of creditor protection as a properly drafted will.

(5) Setting up a trust is all that there is to be done. Setting up the revocable trust or living trust is only the first step of the process - you must then properly fund the trust (transfer your assets into the trust). This means you need to examine re-titling your house into a trust, re-titling your brokerage and investment accounts and placing your physical assets into the name of the trust. A life estate deed can accomplish many of the same objectives as a trust, but at a fraction of the cost. Further, improper funding of a trust can lead to the assets going through probate, which defeats the purpose of having the trust in place.