The Eternal Question – Revocable “Living” Trust or Will?

December, 2023  | By Carl E. Eastwick and Elizabeth A. Fitch

Revocable living trusts have been marketed so successfully that many people think they can’t live—or die—without one. The promises of avoiding probate, ensuring privacy, reducing estate taxes, and preparing for incapacity seem too enticing to pass up. Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust. But what everyone really needs is some good advice.

Living trusts can be useful in limited circumstances, but most of us should sit down with an independent planner to decide whether a living trust is suitable. A revocable living trust is essentially a substitute for a will. Rather than having your estate administered through probate, you would retitle your assets in the name of a trust created for this purpose. Because the trust is revocable, you can amend or revoke it as necessary during your lifetime. Upon your death, the trust becomes irrevocable, and your trustee simply distributes the assets to your beneficiaries. Time is saved, costs are minimized, and probate is avoided. What’s not to like?

For certain assets, probate can even be avoided without the need for a trust. By titling your house, bank account, or other assets jointly with your spouse or partner, you can ensure an immediate transfer of the property to the surviving owner. Simply naming a beneficiary on a life insurance policy or retirement account achieves the same result—the asset transfers to the beneficiary upon your death and with minimal delay. “Transfer on death” provisions, which also name a beneficiary, can be added to many other kinds of accounts as well.

What are the potential drawbacks of a trust?

One potential pitfall is that a living trust is created but never fully funded. For example, the house may have been retitled in the name of the trust, but bank accounts, CDs, and retirement assets might have been overlooked. After your death, it would then be necessary to administer an estate and a trust. Unless you expend the time and effort to fund the trust, the process you hoped to simplify would be more complex than you and your family expected, and the goal of avoiding probate would be defeated.

Even if the trust is properly funded, the after-death savings in time and money could be outweighed by the trouble and expense of setting up and maintaining the trust in your lifetime. Expenses include drawing up the trust agreement as well as a “pour over” will to channel into the trust any assets that were not titled in its name. Real estate deeds, securities transfers, and titles to cars and boats must also be prepared. Anyone contemplating a trust should remember that the up-front expenses are considerable, and the more complicated your assets, the greater these expenses will be.

A living trust will help you sidestep the probate process, which means quicker distribution of your assets upon your death. But in Maryland at least, probate is relatively efficient and economical, and it includes several important legal safeguards. Court oversight will help to ensure that the process is carried out properly. And established procedures will help to address any challenges to your will or the administration of your estate.

Does a revocable trust save estate taxes?

All the assets held in your revocable trust will be included in your “gross estate” and will be subject to the federal Estate Tax. In this respect, there is no difference between a trust and a probate estate. In either case, your estate will owe tax if the estate is large enough to generate a tax that exceeds the credit in effect at the time of your death. Even if your estate is under the federal tax threshold, it might yet be large enough to be exposed to a state estate tax.

Planners can suggest some tax saving strategies to avoid or reduce the tax. The same strategies are available to users of either a trust or a will to plan their estates.

What are some good uses for a revocable trust?

Another claimed advantage of living trusts is that they can prevent the need for a court-appointed guardian in case you become incapacitated. For older people with relatively straightforward financial and real estate holdings, this can be a genuine benefit. The trustee has complete control of the person’s assets and can manage them for as long as necessary. The same goal can be accomplished much less expensively, however, by preparing a durable power of attorney. An essential part of every estate plan, a durable power of attorney enables you to designate someone to manage your financial affairs if you become unable to.

Who then does need a living trust? Anyone who owns real estate in more than one U.S. state is an excellent candidate. Titling each of the properties in the name of the trust will prevent the need for opening an “ancillary” estate in each location. Someone who has special concerns about privacy may also want to consider a living trust. Probate is a public process, and the documents that must be filed become part of the public record. A list of the assets in a living trust may also be filed if Maryland Inheritance Tax must be paid, but the trust instrument itself can be kept private.

An effective estate plan takes all your assets and planning goals into account. A revocable living trust can be part of your plan, but choosing this device should not be where the planning begins. An attorney who practices in this area can tell you whether a revocable living trust is right for you.

If you have questions about revocable living trusts, please reach out to one of our estate planning attorneysCarl Eastwick or Elizabeth Fitch.

This article is intended to provide general information about legal topics and should not be construed as legal advice.