The Living Trust for a Pennsylvania Resident
- Myths and Facts
Introduction
Definitions
Living Trust Myths
The Facts - When is a Living Trust Appropriate
in Pennsylvania?
Summary
Resources and Links
Introduction
In recent years there has been a good deal of publicity about the need
for a "Living Trust" and the inadequacy of wills. Often, this is
nothing more than a sales pitch - an effort to have you purchase services
from someone who wants to sell you something. That someone may be
a lawyer who wants to sell you his or her legal services by trying to convince
you that you need something more than what you already have (your will). That
someone may be a person who is not licensed to practice law and who is engaging
in the unauthorized practice of law, who wants to sell his or her unauthorized
services to you, quite possibly to your detriment because of the absence
of adequate knowledge and skill to properly advise you. That someone
may also be an unscrupulous criminal who wants to get control of the assets
that you might put in that trust so he or she can steal those assets from
you. It is important to be cautious about the use of a Living Trust. There
are, however, some circumstances that make a Living Trust appropriate in
Pennsylvania and a Living Trust may even be the best plan for some people.
The purpose of this article is to attempt to separate the sales pitches
and myths from the facts and to provide a brief and simple explanation when
a Living Trust might be appropriate in Pennsylvania.
Preliminarily, it should be noted that if you are dealing with honest,
licensed and competent professionals, the use of a Living Trust would
rarely, if ever, create legal problems. It may simply
be unwarranted and unnecessary, resulting in extra expense and extra
complications that could have been avoided and that may produce no benefit
to you. If you are dealing with dishonest or incompetent people,
the use of a Living Trust might not only create no benefit, it might
result in significant financial harm to you. The harm might be the
loss of an opportunity to properly plan your estate and maximize tax savings
or it might be the payment of unnecessary and exorbitant fees. It
might be much worse - the loss of your assets through theft.
What is a "Trust"?
- A "Trust" is a relationship created by one person (the Settlor or Grantor)
in which some asset (the Corpus or Principal) is controlled by another
person (the Trustee) for the benefit of a third person (the Beneficiary).
Two or all three of the persons can all be the same person - that is the
Settlor can also be the Trustee or the Beneficiary or both. There
are many different kinds of trusts.
What is a "Living Trust"?
- This is a Trust that is created by the Settlor during his or her
lifetime. This is contrasted with a "Testamentary Trust" that is
created upon the person's death by the terms of his or her will. Generally,
the term "Living Trust" is meant to refer to a "Revocable Trust" created
by the Settlor during his or her lifetime. This is a Trust that the
Settlor can change or revoke at any time. This is contrasted with an
"Irrevocable Trust" - one that the Settlor can never change or terminate.
Usually, the Settlor serves as the Trustee of the Living Trust as long
as the Settlor is alive and competent. The Living Trust can be one
that is actually funded and administered during the Settlor's lifetime or
it can be a "Standby Trust" - one that is created but held in reserve in
case it is needed. Generally, upon the Settlor's death, the Living
Trust serves as a substitute or partial substitute for the Settlor's will.
Living Trust Myths
Myth - you need a Living Trust to save taxes - It may
be helpful to explain what a Living Trust cannot do - it cannot save any
more taxes than a properly planned and drafted will. An appropriate
estate plan can save significant taxes. However, every tax-saving
plan can be embodied in either a will or a Living Trust. Neither has
any benefit over the other for tax savings. It is only in other areas
that one document might have an advantage over the other or a disadvantage
as contrasted with the other. We will discuss those areas below.
Myth - probate is something to be avoided at any cost
- This may in fact be true in some states where probate is a costly and
time-consuming procedure but it is certainly not true in Pennsylvania.
Pennsylvania probate proceedings are relatively simple and inexpensive
in most situations. Often, the only formal proceedings are the initial
meeting at the office of the Register of Wills and the issuance of "Letters"
- the official document that appoints an executor or administrator of the
estate. A Living Trust can (but does not necessarily) avoid probate,
however, the expense of creating the Living Trust might be more than the
probate fees that were "saved." [See our Table of Probate Fees
in the five-county Philadelphia metropolitan area.] Remember, avoiding
probate does not save any taxes at all!
Myth - if you have a Living Trust you do not need a will
- A Living Trust might eliminate the need for a will - but only if every
single asset that you own has been transferred to the Living Trust or given
away during your lifetime. Generally, any asset that has not been
transferred to the Living Trust or has not been given away during your
lifetime will require a will in order to be passed to your heirs in the
intended way. (Assets that are titled jointly with someone else with
rights of survivorship would also pass without a will.) Therefore,
unless you intend to take your chances that the intestate laws will produce
your desired results upon your death, you still need a will in addition
to a Living Trust, in order to be certain that nothing was overlooked in
transferring assets to the Living Trust.
Myth - your lawyer will try to talk you out of a Living Trust
for his or her own selfish reasons - Some marketing literature
might suggest that your lawyer will not want you to use a Living Trust because
he or she will make more money if you must go through probate proceedings.
First, if you really think your lawyer would be motivated to give you
bad advice for that reason, perhaps you should select another lawyer in
whom you have more confidence. Second, remember that drafting a Living
Trust (and in most cases also a will) is more complicated than a will alone
and would usually result in higher initial legal fees. The Living
Trust also requires additional work, such as asset transfers, that might
result in additional up-front legal fees. Third, the lawyer who prepares
your will for you has no guarantee that your executor will employ the same
lawyer to assist in administering your estate, so there is no assurance
of any additional fees from the probate and estate administration proceedings
in the future. Fourth, most of the work that the lawyer might perform
in the future - such as gathering information, preparing Inheritance and
Estate Tax Returns, etc. - would be substantially the same whether or not
there is a probate proceeding. A competent and ethical lawyer will
try to do what is best for his or her client.
The Facts - When is a Living Trust Appropriate in Pennsylvania?
Where you own real estate outside Pennsylvania - If
a Pennsylvania resident owns real estate in another state when he or she
dies, the executor may be required to engage in probate proceedings in
that other state. This can be especially troublesome in states where
probate proceedings are difficult, expensive and/or time consuming. (Generally,
this is not a problem in our neighboring state of New Jersey.) If
the out-of-state real estate is owned by the Living Trust (titled in the
name of the Trustee, in the capacity of Trustee), the other probate proceedings
are probably not necessary. Under these circumstances, a Living Trust
is advisable.
Where you have concerns about your financial affairs if you
become disabled and a Power of Attorney will not be adequate -
A Living Trust can provide a vehicle for having your financial affairs
administered if you become incapable of doing this yourself. One
solution to this problem is to have a Power of Attorney in which you appoint
an agent to act for you. However, you may wish to create more controls,
conditions and structure than are normally found in a Power of Attorney.
This can be accomplished by using a Living Trust. Under these circumstances,
a Living Trust may provide a solution.
Where a business requires no break in continuity of control
- A Living Trust can provide a source of continuity in the operation and
management of a closely held business if the controlling owner-Settlor
becomes disabled or dies. If the Trustee is the controlling owner,
the Trustee (or a successor Trustee) may be able to continue to manage
the business even if the Settlor can no longer do so or the Trustee may
be able to more quickly transfer ownership to the new owner (perhaps the
Settlor's child) than where a probate proceeding is required. If the
controlling owner died without a Living Trust, management might come to
a halt until a will could be offered for probate and an executor could be
appointed. Even if that period of time was relatively brief - a few
days or a week - the absence of management authority could be disastrous.
Under these circumstances, a Living Trust may be advisable.
Where you expect a challenge to your will - A Living Trust
can be more difficult to challenge than a will. If the Settlor has
set up and operated the Living Trust during his or her lifetime,
this creates evidence that the Settlor knew what he or she wanted to do
and that the Living Trust sets forth that intention. Had it not been
what the Settlor wanted, he or she would have changed it while alive. The
Settlor's actions also demonstrate how he or she wanted the terms of the
Living Trust interpreted. If the Settlor was the Trustee, it also
tends to demonstrate that the Settlor understood what he or she was doing
and was competent at the time the Living Trust was created. Your will
does not become effective until you die. You never have the opportunity
to operate under its terms. Thus, after your death, it may be easier
for someone to challenge whether you were competent at the time you signed
it, to challenge whether the will set forth what you intended or to challenge
whether your executor's interpretation of the will is correct. Where
challenges of the will are anticipated, a Living Trust may be appropriate
for these reasons.
Summary
- When a person, knowing both the advantages and disadvantages of the Living
Trust, decides that it represents the best plan for him or her, there is
no particular reason to avoid using it. There is no substitute for
a person's free choice. If someone understands the additional costs
and complications involved and prefers the use of a Living Trust, even though
none of the advantages appear relevant, that person certainly has the right
to employ a Living Trust in his or her estate plan. The purpose of
this article is not to discourage the use of Living Trusts but merely to help
people separate the myths from the facts and to enable people to decide whether
to use a Living Trust based upon the facts and not upon the myths.
Resources and Links
The Allegheny County Bar Association has published a booklet, available
on line at its web site. This booklet discusses the topic of Living
Trusts in more detail. Click here for a
link to that booklet.
The Pennsylvania Office of the Attorney General has investigated various
scams involving Living Trusts. If you have suspicions about any solicitations
concerning Living Trusts, please contact the Attorney General's Office
of Consumer Protection. See the Attorney
General's web site. See the Attorney General's Consumer
Advisory.
The Federal Trade Commission also has a warning on its Facts for
Consumers web page about Living Trust scams.
Note - This article is only meant to
provide general information about Living Trusts in Pennsylvania. It is
not an attempt to answer all the questions that may arise about Living
Trusts nor is it intended as legal advice. You should consult an attorney
with your specific questions about the advisability of a Living Trust for
your own situation.
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Notice Pursuant to Final Regulations Under Circular
230, effective June 20, 2005
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The opinions contained in any communication on the
web site are not intended or written to be used, and cannot be used, by any
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© 2004-2005 Marc H. Jaffe
Fromhold Jaffe & Adams
Attorneys
at Law
Villanova Center - Suite 220
789 East Lancaster Avenue
Villanova, Pennsylvania 19085
610-527-9100
www.fromholdjaffe.com
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