A Trust is a legal instrument in which a Grantor transfers legal ownership to a Trustee (or Trustees) for the benefit of the Beneficiary (or Beneficiaries). The Grantor writes his or her own rules for the management of the trust assets. When a Grantor creates a trust for the benefit of himself or herself, the resulting trust is commonly referred to as a Revocable Living Trust (RLT).
Common Misconceptions of RLTs:
- They save federal estate tax and/or Pennsylvania Inheritance tax. An RLT does not reduce federal or state taxes related to death – only your overall estate plan affects your tax liability. An RLT can potentially reduce probate fees.
- An RLT will keep my estate out of probate. Only true if ALL of the Grantor’s asset are legally titled in the name of the RLT. Some assets are not appropriate to be held in an RLT; it is very cumbersome to ensure that all assets have been transferred.
- An RLT will provide creditor protection for the assets. Only an irrevocable trust can have creditor protection. Further, the Grantor generally cannot create an irrevocable trust to hold assets for his/her own benefit; the trust must be for the benefit of someone other than the Grantor. This means that the assets in such a trust no longer belong to the Grantor.
In some states, for example California and New York, probate laws are onerous and expensive. RLTs are commonly used for the majority of people in those states. In Pennsylvania, however, probate is neither onerous nor expensive. You may pay an attorney MORE to set up an RLT than you would to pay the necessary probate fees. In Allegheny County, an estate valued at $500,000 – $1,000,000 will incur probate fees of $650; an attorney will likely charge more than $1,500 to simply draft the RLT document – this fee does not include filing fees for transferring of assets.
You should consider a RLT if:
- You own real property in more than one state. An RLT can help to avoid opening ancillary estates in other jurisdictions.
- Privacy. Wills are a matter of public record while RLTs are not.
- Medical condition(s) that may make it difficult for you to manage you own affairs. Assets held in such a trust can be managed by the Trustee, or successor Trustee, without the need for a Power of Attorney or Guardianship.