A living revocable trust is a trust created during the lifetime of the grantor. Under this instrument, the grantor acts as the trustee during their lifetime and retains complete control over the corpus of the trust. While the grantor is alive and has the capacity, they have the authority to revoke the trust, change the terms of the trust, remove property from the trust, and add a property to the living revocable trust.

What are some of the common misconceptions about a living revocable trust?

1) Generally, there are no tax benefits to a living revocable trust

When an individual creates a living revocable trust, they are simply transferring taxed assets into a financial structure. The assets are subject to tax upon their death because they are part of their estate for federal estate tax purposes. Financial instruments like the unified estate tax credit, the unlimited marital deduction, and unlimited charitable deduction may be incorporated into the financial structure of a living trust. However, the total estate subject to the estate tax will not benefit from the instrument.

To illustrate, look at the following example. Mary dies in 2019 and executed a will in 2013. Assume every asset Mary owns will pass under her 2013 will. At her death, Mary owned a residential house worth $4 million dollars, stock options worth $2 million dollars, and a checking account with $1 million dollars. Under Section 2033 of the Federal Estate tax provisions, Mary’s total estate is worth $7 million dollars.

Now assume that instead of creating a will in 2013, Mary created a revocable living trust. Furthermore, assume all three of Mary’s assets were titled in the trust when she died. Under Section 2036 of the Federal Estate tax provisions, Mary’s total estate is still worth $7 million dollars. Although the provision of the tax code causing inclusion changed, Mary’s estate is still subject to the same federal estate tax. Living trusts fail to exclude your assets from federal estate tax inclusion.

A living revocable trust also fails to provide the grantor with any income tax benefits. As long as the grantor is alive, they essentially own the trust for income tax purposes. Therefore, any income that the trust receives is treated the same way as if the grantor owned the property in their individual capacity.

Taxes on Living Revocable Trusts

In fact, living revocable trust may be subject to some disadvantages for income tax purposes. First, while an estate may select the fiscal year, a trust must apply a calendar year. This can become a problem because an estate can pour into a trust. This difference can result in the deferral of income taxes on the estate’s income. Second, the taxable income of a trust is subject to a lower federal tax exemption. The federal tax exemption is only $100 or $300 for trusts (depending on the trusts level of complexity), but $600 for estates.

Living revocable trusts fail to provide the grantor with any gift tax benefits. While it is true the grantor does not have to pay any gift tax on the assets transferred to the trust, the grantor would not have to pay any gift taxes on those items if he never transferred his assets to the trust.

It is best to consult with an attorney as to the appropriate way to proceed in the case that you are interested in creating a living trust in order to prevent any needless expense and frustration. It is important to implement a clear plan free from inconsistency and waste for your elder years.

2) Avoiding probate is not always in the best interest of the client.

Probate involves the court-supervised process that allows for the distribution of your assets upon death. While some of your assets will automatically be conveyed to another party outside of the probate process such as property subject to joint ownership, the remainder will distribute according to your next of kin.

a) The probate process offers several benefits.

The cost of probate may be considerable due to both court and legal fees. However, it may actually cost less than the legal fees associated with establishing a trust. In many states, the cost of probate is not excessive. For example, the regular estate probate fee in Maryland for an estate worth between $250,000 and $500,000 is only $500. Other legal costs dealing with estate administration are often much higher than the cost of the probate court. While attorney’s fees and personal representative fees associated with the probate process may add up, they are both subject to a statutory cap related to the total amount of the probate assets. In some circumstances, it may be effective for a personal representative that is also the beneficiary to collect the highest commission possible in order to deduct from the amount of the estate subject to the federal estate tax.

Probate also allows for court supervision, which gives interested persons an opportunity to object prior to distribution. The beneficiaries of a living trust, on the other hand, will need to sue the trustee following the potential mismanagement of the estate. Often times, previously existing tension within a family unit will be worse when a single person closes up the affairs of a deceased relative. Judicial oversight eases this tension and may increase comfort throughout the family. This occurs because the assets are transferring according to the deceased’s wishes.

Additional Benefits

Probate may limit the time a claim can be brought by a creditor against the decedent’s estate. For example, Maryland and the District of Columbia both limit the time in which a creditor can bring a claim against an estate going through probate. In both jurisdictions, the period is significantly less than the normal statute of limitations for civil claims. Therefore, not going through the probate process and having a revocable living trust could extend the time period in which creditors can bring claims.

Probate can also be a relatively simple process. Maryland, for example, has a simple probate process with separate procedures for large estates and small estates. Modified administration is also available in the case that the only beneficiaries are the spouse, children, or personal representative.

b) There are many other ways to avoid probate.

Living trusts are not the only way to avoid probate. For example, proceeds from life insurance and retirement benefits pass directly to the assigned beneficiary outside the probate process. Additionally, any property held in joint ownership, subject to a few exceptions, will become the sole property of the joint owner. A life estate and a “pay on death” account also provide the opportunity to avoid probate. Generally, the only property that the person owns individually will pass through the probate process.

c) The creation of a Living Revocable Trust– without more – does not avoid probate

Simply creating a living revocable trust does not circumvent probate. If you fail to place all of your assets in the living trust, the remaining assets could be subject to probate. Placing various assets in the living trust can be difficult. For example, in order to transfer real property into a living trust, a new deed reflecting that the property is owned by the trust must be executed. You must take care to ensure that the exact legal description in the existing deed appears on the new deed. If it does not, you may need a probate proceeding to determine the proper beneficiaries. This concern underlies all types of property transferred to the trust. It also showcases the importance and precision needed to successfully transfer all of your assets to the living trust. This must be adhered to if you hope to avoid the probate process.

In conclusion, the question of whether you should avoid probate depends on the individual client’s goals, capacity, and wishes. If you are thinking of setting up a will or living revocable trust, talk to an experienced estate-planning attorney.

Contact our DC Law Office for More Information

For more information on common misconceptions about living revocable trusts, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.