The Revocable Living Trust: The Facts And The Fiction

By: Anthony J. Enea, Esq.*

Over the last ten to fifteen years much has been written about the Revocable Living Trust by estate and financial planners, some of which has been factually accurate and some of which has been purely fictional. By most accounts the Living Trust was first heavily promoted by estate planners in California where the cost of probate and the length of time involved in probating a Last Will and Testament has been described as onerous. However, as a result of extensive promotion the popularity of the Living Trust has spread eastward over the last five years. Although it has not been widely embraced by attorneys in New York, its use as an estate planning tool has increased in popularity.

WHAT IS A REVOCABLE LIVING TRUST?

A Revocable Living Trust is a written instrument created during the lifetime of the Grantor (the person establishing the trust) and is effective during the lifetime of the Grantor with respect to the assets which are placed into the trust. The trust is not effective until it is funded with assets. The Revocable Living Trust is distinguishable from a testamentary trust which is made a part of a Last Will and Testament, and only becomes effective upon the death of the testator (the drafter of the Will).

The Grantor of a Revocable Living Trust retains the power to freely amend and revoke the trust as well as to reacquire its assets. It is distinguishable from an Irrevocable Trust which cannot be amended or revoked by the Grantor.

New York now permits the same person to be both the sole trustee and the sole holder of the present beneficial interest so long as one or more other persons holds a beneficial interest. The beneficial interest held by the other person can be vested or contingent (present or future). A lifetime trust will be deemed to be irrevocable unless it expressly provides that is revocable.

ADVANTAGES OVER USE OF A LAST WILL

The use of a Revocable Living Trust rather than a Last Will and Testament as an estate planning tool provides the following benefits:

A. Avoids the cost and time of probate and its attending expenses such as Court filing fees, legal fees, guardian ad litem fees and executor's commissions (but, will have trustee's commissions);

B. Helps avoid potential challenges to a Last Will and Testament regarding issues of Testator's competency. Attacks on grounds of lack of due execution are very difficult, although standard of competency required to execute a revocable trust is higher, e.g.; capacity to make a contract;

C. A Revocable Living Trust protects Grantor's privacy. It is a private document, unlike a Will its provisions are not accessible for public review;

D. Assets in the Revocable Living Trust will be available for immediate distribution after the death of the Grantor, subject to insuring sufficient assets are available to pay estate taxes;

E. No gift tax consequences of making transfer of assets to the trust.

F. Continuation of asset management of Trust assets in the event of disability of Grantor/Beneficiary.

THE DISADVANTAGES OF USING A LIVING TRUST

There are some disadvantages to utilizing a Living Trust:

A. You must transfer all of your assets including title to any real property to the Trust during your lifetime, additionally, any assets acquired during the Trust's existence must be transferred to the Trust;

B. The cost of having an attorney prepare a Revocable Living Trust is generally higher than the cost of preparing a Last Will and Testament;

C. There will be legal fees incurred in amending or modifying the Trust during your lifetime and you will still need a Last Will (commonly known as a "pour over" Will) in the event there are assets which have not been transferred to the Trust.

THE FICTION

Many estate planning professionals in their advertisements and writings relevant to Revocable Living Trusts have all too often exaggerated the estate tax advantages of utilizing a Revocable Living Trust rather than a Last Will. All of the estate tax planning that can be implemented through the use of a Revocable Living Trust can also be effectuated through the use of a Last Will. For example, the use of Credit Shelter Trusts can be implemented in a Last Will. In my opinion, the Revocable Living Trust has no advantages over a Last Will for estate tax planning purposes.

The Revocable Living Trust does not eliminate in its entirety the need to have a Last Will. Even if you have a Living Trust it is still advisable that you have a Last Will. It is highly unlikely that you will have transferred all of your assets into a Living Trust prior to your death, thus, creating the need for the existence of a Will to transfer the assets that are in your name alone at the time of your death.

Furthermore, the assets transferred to the Revocable Living Trust are not protected for purposes of Medicaid eligibility and long term care planning. Because the trust is revocable the assets are considered an available resource for Medicaid eligibility purposes and would be subject to a spend down to Medicaid eligibility levels. In my opinion, this is perhaps the most significant drawback of utilizing this trust.

In conclusion, it is advisable that one consult with an attorney before executing a Revocable Living Trust so as to be able to fully understand the advantages and disadvantages of its usage.