The Truth About Living Trusts

Reprinted with permission from The Allegheny County Bar Association. Issued as a public service by the Probate and Trust Law Section of The Allegheny County Bar Association.

What is a living trust?
A “living trust” is a legal entity to which your assets (bank accounts, securities, house, etc.) can be transferred and managed by a person, including yourself, or corporation (such as a bank or trust company) called a “trustee”. The trustee manages your assets in accordance with written instructions contained in a trust document. Living trusts can be revocable or irrevocable.

Are living trusts something new?
No. Living trusts have existed for centuries. They are more formally called “inter-vivos trusts” to distinguish them from “testamentary trusts” which are contained in Wills and take effect upon death. Living trusts traditionally were and still are used for the management of assets of those requiring or desiring such services.

Why am I hearing so much about living trusts now?
Today, revocable living trusts are heavily marketed as substitutes for Wills, often using exaggerated tales of costs and delays in the administration of estates under Wills (sometimes called the “probate” process) as a sales tactic. Publicity has arisen from these sales activities as well as from press coverage of fines and other sanctions imposed by the Pennsylvania Attorney General on certain vendors of living trusts.

Do I need a revocable living trust?
The answer depends on your unique family situation, financial position and goals. In Pennsylvania, the benefit of creating a living trust for the sole purpose of avoiding probate is debatable. This is because in Pennsylvania, probate entails relatively moderate cost and less time in comparison to many other states. Executors named in Wills to administer estates are accorded much flexibility in decision-making, and Courts do not become involved in each detail of the estate administration process.

Does having a revocable living trust reduce taxes?
No. The Pennsylvania Inheritance Tax and Federal Estate Tax are the same, regardless of whether assets are administered through a revocable living trust or under a Will. Also, estate planning techniques designed to reduce these taxes are available under Wills to the same extent they are available under revocable living trusts.

What about legal fees?
Overall, legal fees may be more or less with revocable living trusts than Wills. For the provisions of a living trust to control, a trust document must be prepared and your assets must be transferred to the trust during your lifetime. This often entails significant legal fees. On the other hand, a living trust may reduce or eliminate Court filing fees incurred after your death with a Will. After death, both trustees of living trusts and executors under Wills require legal advice as to the proper payment of taxes and creditors, distribution to beneficiaries, document interpretation and other issues. Also, a Will is advisable even if you have a living trust to provide for the administration and distribution of assets not transferred to the trust during your lifetime. Note that the reasonableness of legal fees charged to trusts is judged by the same rules of professional responsibility as legal fees charged to estates.

Are there disadvantages to living trusts?
If assets are distributed through a living trust instead of your estate after death, beneficiaries will have no automatic legal right to the notices required for estates. Trustees of living trusts who decline to follow the procedures used by executors under Wills to conclude the administration of estates may remain subject indefinitely to personal liability, even after funds have been distributed. Also, while personal representatives of estates are granted broad legal authority to fully wind up a decedent’s affairs, as evidenced by a certificate issued by the Register of Wills, trustees of living trusts have no authority beyond assets placed in the trust.

How do I know what I need?
The only way to be certain your specific needs and desires are met is to consult a trusted attorney or an attorney referred to you by a trusted source. High pressure solicitations by mail or in person should be viewed with skepticism. Your financial and estate planning situation is unique and should be accorded the proper time, attention and expertise which only a properly trained and experienced attorney can provide.