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  • Writer's pictureJose Roman

Is a Living Trust Right For You?

Updated: Mar 30, 2023

By: Jose Roman

Estate planning is an essential part of preparing for the future, and a living trust is an increasingly popular tool in the estate planning toolkit. A living trust, also known as a revocable trust, is a legal document that allows you to transfer ownership of your assets to a trust while you are still alive, and then transfer them to your beneficiaries upon your death. In this blog post, we will discuss the pros and cons of having a living trust in your estate plan.

Pros of having a living trust in your estate plan

Avoidance of Probate: One of the most significant advantages of a living trust is the avoidance of probate. Probate is a court process that is required when an individual passes away without a trust, and it can be a time-consuming and expensive process. With a living trust, your assets will be distributed to your beneficiaries according to your wishes without having to go through probate, saving time and money for your loved ones. With that being said, the probate process is less expensive and time consuming compared to other states such as California, a state known for its high-profile probate horror stories.

Privacy: Probate proceedings are a matter of public record, which means that anyone can access information about your estate and your beneficiaries. With a living trust, your estate can be kept private, as the distribution of your assets will not be subject to public record. This point comes with a BIG but. Even if you have a trust, your estate is still required to file an Inheritance Tax return, which must include a copy of your trust. This tax return can become a part of the public record. Unless you are a high profile celebrity most people are not interested in looking up the Inheritance Tax returns of ordinary citizens. Even if your trust does become public, it is unlikely anyone is going to care enough to look it up.

Control: With a living trust, you retain control over your assets while you are alive. You can make changes to the trust at any time, and you can name a successor trustee who will manage the trust and distribute the assets according to your wishes if you become incapacitated or pass away. By default, all trusts in Pennsylvania are revocable unless they specify otherwise. An irrevocable trust is more complicated to change. Both types have their pros and cons, but generally speaking living trusts are revocable.

Protection for Minor Beneficiaries: A living trust can also be used to protect the interests of minor beneficiaries. You can name a trustee to manage the trust until the beneficiaries reach a certain age, ensuring that their inheritance is protected and managed responsibly. Alternatives to trusts for minors include guardianships and custodianships, but both have age limits to them, after which a child’s inheritance must be distributed to them. With a trust you determine at what age and in what proportion a child/grandchild/great-grandchild, etc. receives their inheritance.

Cons of having a living trust in your estate plan

Cost: Setting up a living trust can be more expensive than other estate planning tools such as a simple Will. In addition, transferring assets to the trust, which is called "funding" the trust, can also come with costs, such as filing fees, appraisal fees, and legal fees. These costs can add up, making a living trust a more expensive option for estate planning.

Maintenance: A living trust requires ongoing maintenance to ensure that it remains valid and effective. This includes updating the trust as your assets and circumstances change, properly titling your assets in the name of the trust and filing tax returns for the trust. Failure to maintain the trust properly could lead to unintended consequences or render the trust ineffective.

Loss of Certain Tax Benefits: While a living trust can offer benefits such as avoiding probate and maintaining privacy, it may also result in the loss of certain tax benefits. For example, assets transferred to a living trust are not eligible for the step-up in basis that occurs at the owner's death, which means that beneficiaries may have to pay capital gains tax on any appreciation in value that occurred before the transfer to the trust.

Limited Protection from Creditors: While a living trust can offer some protection for your assets from creditors, it is not a foolproof solution. If you transfer assets to the trust while you are insolvent or with the intent to defraud creditors, those assets may still be accessible to creditors. Additionally, Pennsylvania has laws that allow certain creditors to reach assets held in a living trust regardless of any spendthrift provisions.

Lack of Court Oversight: While avoiding probate is often seen as an advantage of a living trust, it can also be a disadvantage. Without the oversight of the probate court, there may be less protection for beneficiaries who are minors or have special needs, and there may be less transparency in the distribution of assets. Additionally, if disputes arise among beneficiaries or trustees, there may be fewer mechanisms in place to resolve them.

A living trust can be an effective tool in your estate planning strategy, but it is not without its drawbacks. You should carefully consider your specific needs and circumstances before deciding whether a living trust is right for you. A living trust is also only one part of your estate plan, even with a living trust you still need a will, a financial power of attorney and a healthcare power of attorney with a living will or advanced directive to round out your estate plan. Consulting with an experienced estate planning attorney can help you determine the best approach for protecting your assets and ensuring that your wishes are carried out after your passing.

Don't wait until it's too late - start planning your estate today with our help. Contact us to schedule a consultation and let us help you protect your assets, minimize taxes, and ensure that your wishes are carried out. Your future and your loved ones' future are too important to leave to chance - let us help you create a comprehensive estate plan that gives you peace of mind. Contact us today!

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