A trust is a written document which creates an asset holding entity for the benefit of someone or something.
Trusts are generally created while the Grantor is alive, or by the means of the person’s estate plan.
Some trusts are effective while the Grantor is alive, and others take effect at the time of the death. The trust is governed by the terms under which it was created. The person or entity who holds legal title or interest, and who has the responsibility to manage the assets and distribute the income or assets, is called the Trustee.
There are numerous reasons to create a trust including second marriages, the prevention of probate or ancillary probate, to prevent or minimize death taxes, to manage assets on behalf of children until they attain a certain stated age, to maintain and care for pets, and to allow a disabled person to maintain government benefits.
Different types of trusts include:
- Revocable Living Trusts (RLT)
- Irrevocable Life Insurance Trust
- Special Needs Trust
- Trusts for Minors
- Pet Trust
One of the most misunderstood estate planning documents is a Revocable Living Trust.
During the grantor’s life time, he or she creates a Trust and then must transfer ownership of their assets into the it. These assets are then managed by the named grantee, and upon the grantor’s death, pass according to the directions contained within the document. However, many people do not need or want this form of estate planning.
When is a Revocable Living Trust beneficial?
An RLT can potentially:
- Eliminate or minimize probate,
- Avoid having an estate in two or more states, and
- Allow for the orderly administration of investments.
Does a Revocable Living Trust prevent litigation?
No. This document normally does not preempt any court proceeding.
Does a Revocable Living Trust shelter or otherwise preserve assets from litigation or Medical Assistance?
No. Your Trust can be revoked at any time while you are alive. Therefore, the assets in your RLT are subject to your creditors and available to pay for the cost of nursing home care.
Does a Revocable Living Trust automatically prevent the necessity to open an estate?
No, you must re-title your assets into your Trust for them to avoid passing through probate. A failure to do so could mean those assets become part of your estate.
Is a Revocable Living Trust inexpensive?
No. The preparation and administration of this type of trust is often an involved and expensive process.
Do you still need other estate planning documents?
Yes. A Revocable Living Trust may not include all of your assets and does not contain medical instructions, nor grant the authorities found in a Power of Attorney.
Does an Revocable Living Trust have income tax advantages?
No. Taxes are paid on the income generated by the assets in the Trust and that income is included on your personal tax returns.
Does an Revocable Living Trust have estate tax advantages?
No. The assets in the Trust are included in the calculation for estate tax purposes.
Is an Revocable Living Trust the exclusive method to avoid probate?
No. You may name beneficiaries on your assets. This includes:
- TOD – Transfer on Death for stock accounts,
- POD – Payable on Death for bank accounts, and
- LED – Life Estate Deeds for real property.
These designations allow assets to pass directly to the person(s) of your choice upon your death, bypassing probate.
Is an Revocable Living Trust the exclusive method to avoid a guardianship?
No. Financial Powers of Attorney allow your Attorney-In-Fact (named agent) to manage your financial affairs and property. POA’s are usually less expensive to create and administer as well as normally less cumbersome than RLTs.
In summation, although a useful estate planning document in specific situations, a Revocable Living Trust is not an estate/probate cure-all.
Disclaimer – This overview is provided for general information relevant for planning undertaken in Maryland only. None of the information within should be relied upon. Statutes, regulations, and the cases interpreting them are constantly changing. Consult an attorney before taking any action. Your reliance on or use of this information does not create an attorney/client relationship or privilege between you and the law firm and its employees, or their heirs, personal representatives, successors, or assigns.
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