There’s a growing perception that a Revocable Living Trust is a more advantageous estate planning tool compared to the traditional Last Will and Testament (Will). This alert aims to address some of the misconceptions surrounding the “Revocable Living Trust versus Will” debate and explain the scenarios where a Revocable Living Trust can be more advantageous than a traditional Will.
First, what is a Revocable Living Trust (RLT)?
An RLT is a trust that a grantor (the person who creates the trust) sets up during his or her lifetime and to which the grantor transfers most or all of his or her assets. Income can be received from the RLT, along with the right to withdraw principal at any time during the grantor’s life. Additionally, the grantor is permitted to amend or revoke the RLT during his or her lifetime. Upon the death of the grantor, the RLT becomes irrevocable (meaning that it cannot be amended or revoked) and the income and assets are disposed of under the terms specified by the grantor in the written agreement creating the RLT.
Why would someone want a RLT as part of his or her Pennsylvania estate plan?
There are many commonly cited advantages of RLTs which are oftentimes misconstrued and are worth exploring further. The bottom line is that for most clients, it is usually advisable to utilize a traditional Will as opposed to an RLT, as it is more efficient from a cost and time perspective.
Misconception #1 – An RLT offers significant tax advantages compared to a traditional Last Will and Testament.
An RLT is tax neutral in terms of taxes assessed against decedents in Pennsylvania, including Pennsylvania and federal income tax, federal estate tax, and Pennsylvania inheritance tax.
Perhaps the greatest misconception concerning RLTs is that they reduce federal estate taxes due by a decedent upon death. This is not the case — transferring your assets to an RLT does not remove them from your gross taxable federal estate, so these assets remain subject to the federal estate tax.
Similarly, Pennsylvania inheritance tax will still be assessed against the value of the property that is distributed according to the terms of the RLT.
As for income taxes, the grantor of an RLT is generally taxed on the income received from an RLT’s assets as if such assets were owned outright. The result of this classification is that the grantor and the RLT are viewed as being a singular taxpayer for state and federal income tax purposes.
Misconception #2 – With an RLT, you will save a significant amount by not having to pay probate fees, counsel fees, personal representative commissions and other tangential costs and fees associated with probating a Will.
Contrary to popular belief, probate fees and costs for most decedents in Pennsylvania are quite reasonable. For an average client who only owns property in Pennsylvania, the administration process, taxes, fees, and costs of administering an RLT after the grantor’s death are similar to those incurred in administering a decedent’s probate estate (and often more because there is a need to administer both). However, RLTs tend to generate more legal fees and costs to create and administer during the grantor’s life than the fees and costs to draft a Will. Thus, for most people, a straightforward Will is going to end up costing them less in legal fees and costs than creating and administering an RLT.
However, there are two notable situations where an RLT can result in significant cost savings for clients:
- For higher net worth clients, probate fees can be significant in Pennsylvania. Avoiding probate through the use of an RLT, notwithstanding the additional costs associated with drafting and administering an RLT during the grantor’s lifetime, can result in significant savings.
- Similarly, in situations where a grantor owns property outside of Pennsylvania, probate fees as well as legal fees and other tangential costs and fees can be significant in other states. In those situations, creating an RLT and transferring the out of state property into the RLT can usually avoid probate proceedings in that other state, and thus also result in significant savings.
Misconception #3 – An RLT provides significant privacy as compared to a traditional Will.
There is a common misconception with RLTs that they can provide significant privacy as compared to a traditional Will. While it is true that RLTs do not have to go through the probate process in Pennsylvania, as previously noted, Pennsylvania inheritance tax will still be assessed against the value of the property that is distributed according to the terms of the RLT.
Regulations governing inheritance tax in Pennsylvania require that a copy of the RLT be attached to the inheritance tax return at the time it is filed as an exhibit. Inheritance tax returns and their exhibits are public record in Pennsylvania, and thus a copy of the RLT would still be accessible through the Register of Wills’ office for the county in which the grantor last resided. Further, Pennsylvania’s Uniform Trust Act provides for RLT beneficiary notification requirements similar to that of a decedent’s probate estate.
Other Advantages of an RLT compared to a Will.
A few other reasons for which a client may want to set up an RLT include:
- Planning for Incapacity. An RLT can instruct the trustee or successor trustee to manage assets and provide for your financial support in the case of incapacity. A durable financial power of attorney can also authorize your agent to transfer additional property to the trust to keep it adequately funded.
- Speedier Distributions. Some advisors suggest that post-death distributions from an RLT are less complicated and faster than with a Will. However, our experience is that the paperwork request by financial institutions and investments companies is similar for an RLT and a Will and the tax reporting and payment requirements are similar.
Although an RLT may provide certain estate planning advantages, it is important to have a realistic expectation of what an RLT can accomplish in order to make an informed decision as to whether an RLT is appropriate for your estate plan. Barley Snyder’s dedicated trusts and estates attorneys would be happy to assist you in making a decision that is right for you and your family.
If you have any questions regarding revocable living trusts, wills or estate plans in general, please reach out to attorneys Zach Griffith, Jonah Markle, David Rattigan or any member of Barley Snyder’s Trusts & Estates Practice Group.
