Is A Revocable Living Trust Appropriate For Your Client? - The Basics
By Joseph E. Balmer III, Esq. Member, DBA Estate Planning, Trust and Probate Law Commitee
Most attorneys who practice in the estate planning area, at one time or another, encounter the client who requests a revocable living trust and, in response to the question "Why do you want one?" either answers with a general "to avoid probate" or cannot even verbalize a specific reason. Many clients have misconceptions or have been misinformed of the benefits or lack of benefits that a trust may provide, and it is imperative that we, as practitioners, fully explain this to the client to assist him or her in determining whether a trust would be beneficial for his or her needs. Some basic concepts and issues that should be reviewed with the client are as follows:
Avoiding Probate: Many clients possess the misconception that by avoiding probate with a revocable living trust, they will avoid exorbitant costs involved with probate or will avoid assets being tied up for many months or even years. They should be advised that the filing fee for opening an estate in Montgomery County is only $175.00. Additional costs for appraisals, title examinations, title transfer expenses and recording fees may add a few hundred dollars more yet the total probate costs should not exceed several hundred dollars. With a revocable living trust in place, the trustee still must pay someone to assist him or her in title transfers upon the death of the grantor, preparing estate tax returns and possible trustee fees for managing the trust. Also, absent any unusual delays in selling estate assets or caused by will contests, an estate usually can be opened and closed in six to nine months.
Finally, if a client is insistent on avoiding probate, he or she needs to be advised that titling his or her assets in joint tenant with rights of survivorship form or by designating payable on death beneficiaries on assets, those assets can avoid the probate administration process without having to be placed in a trust.
Avoiding Estate Taxes: Another common belief is that by funding a revocable living trust and avoiding probate, those assets in the trust will not be subject to federal estate taxes. This is not necessarily true. Some clients interested in creating a trust to avoid federal estate taxes do not even have a large enough estate to be subject to federal estate taxes. Under the Taxpayer Relief Act of 1997, for the year 1998, only estates in excess of $625,000 are subject to federal estate taxes. This amount will increase each year until the year 2006 when the federal estate tax exemption will have increased to $1,000,000. If a client, if single, or client and spouse, if married, do not anticipate having an accumulated wealth at time of death in excess of this amount, this issue should not be a concern.
Should a client have accumulated wealth in excess of these limits, they may be able to minimize federal estate taxes by providing for a spouse in a marital trust, providing for charities in a charitable trust or creating a life insurance trust. However, a basic revocable living trust will not provide for any federal estate tax savings because the assets in the trust will be deemed to be owned by the decedent at time of death and be subject to estate taxes.
Avoiding Creditors/Medicaid Considerations: Assets placed in a revocable living trust can be reached by creditors. Even assets placed in an irrevocable living trust are subject to creditors' rights if the obligation or debt existed when the trust was established.
Also, creating a revocable living trust will not assist in Medicaid eligibility considerations. Due to the fact that the grantor of the trust retains control over the assets of the trust, those assets will be deemed to be available resources which must be included in determining Medicaid eligibility.
Privacy: To some extent, revocable living trusts provide privacy of one's personal estate planning wishes and accumulated wealth. Unlike a will, a revocable living trust does not have to be filed with the probate court. Also, if an estate must be opened, an inventory and accounts must be filed denoting the description and value of those assets which comprise the estate. The degree of importance that this issue will have will vary depending on the client.
Conclusion: While a revocable living trust can be an effective estate planning tool for some clients, it may be unnecessary for many others. It is imperative to first discuss the goals and needs of the client and the projected wealth of their estate. Finally, after discussing the potential benefits that a revocable living trust may provide, you should consider whether other simpler alternative methods, such as designating payable on death beneficiaries to assets, may accomplish the same goal without creating and funding such a trust. Only then can the client intelligently decide whether the potential benefits of a revocable living trust justifies the cost and effort of creating and maintaining one.
Note: This article appeared in the January 1999 edition of Dayton Bar Briefs, Probate Law News.
