The Living Trust for a Pennsylvania Resident

Topics Discussed Below:

  • 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 properly to 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 also can be the Trustee or the Beneficiary or both. There are many different kinds of trusts.

What is a "Living Trust"? - This is a Trust 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 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 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 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, 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  continue to manage the business even if the Settlor can no longer do so or the Trustee may 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 were 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 if 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 online at its website. 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.

Copyright 2014  Marc H. Jaffe

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.