Estate and Trust Law Article
LIVING TRUSTS: GET THE FACTS!
This article has been developed jointly by the
Estate & Trust Law Section and the Offices of the Registers of Wills.
The Section would like to thank Edwin G. Fee, Jr., Sheldon S. Satisky, Francis
E. Yeatman, and Frederick R. Franke, Jr. for the time and effort that they
have contributed to this project. For links to the Offices of the Registers
of Wills that are on-line in Maryland, go to http://www.registers.state.md.us/index.html.
The Registers also have available a "General Guide to Estate Administration" at http://www.registers.state.md.us/html/pamphlet2.html.
Probate forms may be downloaded from the Registers' at http://www.registers.state.md.us/html/disclaim.html
These common claims about living trusts are frequently
made . . .
. . . but how much truth is in these claims, and does it affect me or my
- LIVING TRUSTS REDUCE
- PROBATE MUST BE AVOIDED.
- ONLY LIVING TRUSTS CAN BE USED TO MANAGE
AFFAIRS AND AVOID GUARDIANSHIP.
- LIVING TRUSTS SAVE TIME AND MONEY.
- LIVING TRUSTS CAN BE USED TO AVOID CREDITORS.
- LIVING TRUSTS ENSURE PRIVACY.
Seminars and articles about revocable living trusts
have become prevalent in recent years. Many people, however, do not need
living trusts. This pamphlet examines some of the claims concerning these
estate planning vehicles.
Living trusts do have certain advantages. For
example, if a person owns real estate in more than one state, a trust may
allow his or her estate to avoid additional probate proceedings in states
other than his or her state of domicile.
If a person anticipates that his or her will may
be contested, then it may be more prudent to establish a living trust, because
a trust may be more difficult to challenge on theories such as incompetence
or undue influence.
A living trust can also be useful if a person
who is in poor health, or who does not want to be bothered with investment
decisions, wants someone else to manage his or her assets. However, it generally
is less complicated and less costly to use a durable general power of attorney
for this purpose. While living trusts can be of benefit in these situations,
they are not the best estate planning choice for most people in most circumstances.
* * *
trusts reduce taxes.
FACT: Living trusts do not save estate,
inheritance, or income taxes.
During the lifetime of the grantor (the person
who creates the trust), the grantor is treated as the owner of the trust
assets. Therefore, all of the income earned by the trust is included in the
grantor’s income. Similarly, when the grantor dies, the assets of the
trust are included in the grantor’s estate for federal estate tax purposes.
All of the traditional methods of minimizing the federal estate tax (such
as use of the unified estate tax credit, the unlimited marital deduction,
and charitable deductions) can be incorporated into a will or a living trust.
Thus, despite the claims of some living trust advocates, there is no income
or estate tax advantage to establishing a living trust.
The Maryland inheritance tax actually may be due sooner if
a decedent has used a living trust, rather than a will. The inheritance tax
on non-probate assets held in a living trust generally is paid shortly after
filing the information report, which is due within 3 months of the appointment
of the personal representative. In contrast, the inheritance tax on probate
(estate) assets generally is paid with the administration account, which
is due within 9 months of the appointment of the personal representative.
After the death of the grantor, living trusts
have several disadvantages for income tax purposes. Although an estate may
select a fiscal year, a trust must have a calendar year. In addition, the
federal income tax exemption is $600 for estates, but only $100 or $300 for
trusts. However, as a result of the Taxpayer Relief Act of 1997, a personal
representative may elect to treat certain qualified revocable trusts as part
of the decedent’s estate for federal income tax purposes.
CLAIM: Probate must be avoided.
FACT: Probate in Maryland is relatively uncomplicated.
Probate is the process whereby a court determines
the validity of a will and supervises the distribution of the assets that
a person owns individually, as opposed to assets that pass automatically
upon death to beneficiaries or joint owners, such as life insurance proceeds,
retirement plan proceeds, and jointly owned assets. Although advocates of
living trusts stress that probate must be avoided at all costs, the evils
of probate are greatly overstated. Certainly, there are court costs and legal
fees associated with probate, but these future costs may be less than the
immediate costs of setting up a trust. In addition, many of the costs associated
with probate, such as preparation of the federal estate tax return, will
be incurred in administering a living trust as well.
Probate provides certain benefits that living
trusts do not. The probate process allows supervision of estate administration
by the probate court and provides notices to beneficiaries, who are given
an opportunity to object. In contrast, a beneficiary of a living trust may
have to sue a trustee in order to challenge the trustee’s actions.
In some states the probate process can be time-consuming
and expensive, but in Maryland it is relatively uncomplicated. Maryland allows
a streamlined probate procedure for small estates (net estate $30,000 or
less or $50,000 or less if the spouse is the only beneficiary). Maryland
also permits a less burdensome modified administration in certain circumstances
if the residuary beneficiaries consist only of certain people who are exempt
from the Maryland inheritance tax. These options reduce the cost and administrative
burdens that often are associated with probate.
In fact, in most states the actual probate fees
are nominal, compared to other costs of estate administration, such as preparation
of the federal estate tax return. In Maryland, for example, the probate fee
for an estate of between $500,000 and $750,000 is $750. The cost of preparing
a federal estate tax return and a fiduciary income tax return (both of which
may have to be prepared whether a will or a revocable trust is used) could
be several times the cost of the probate fee.
Proponents of living trusts argue that a grantor
can establish maximum trustee commissions that are lower than Maryland’s
statutory personal representative commissions. Unlike in New York and some
other states, personal representative commissions in Maryland are not mandatory.
Instead, they are optional and are subject to a statutory cap (9% of the
first $20,000 and 3.6% of the balance of the estate). Furthermore, in certain
situations it makes sense for a personal representative who is also a beneficiary
to elect to receive the greatest commission possible. This may result in
overall tax savings because an estate may deduct the commission at the federal
estate tax rate, but the personal representative pays taxes on the commission
at his or her personal income tax rate (which may be as low as 15% for federal
income tax purposes).
If a person wishes to avoid probate, a living
trust is not the exclusive method of doing so. Probate property generally
includes only those assets that a person owns individually. Jointly owned
property passes automatically to the surviving joint owners without going
through probate. Similarly, life insurance proceeds and retirement benefits
pass directly to the designated beneficiaries. A life estate deed also will
pass property to the remainder person without going through probate. So will
other forms of ownership, such as a "pay on death" account. Joint
titling and pay on death designations should be discussed with an estate
planning attorney to ensure that they are consistent with the overall estate
If a person decides to utilize a living trust,
he or she must transfer all of his or her assets to the trust (or
some other form of non-probate asset) in order to avoid probate completely.
If any assets have not been transferred to the trust (or some other form
of non-probate asset) prior to death, the estate will have to go through
probate anyway. In some situations the value of the assets may be low enough
to permit use of the small estate procedure. Nevertheless, improper or incomplete
transfer of assets to the trust may result in full-scale probate in any event.
CLAIM: Only living trusts can be used to manage
affairs and avoid guardianship.
FACT: A durable power of attorney can avoid guardianship.
Some living trust proponents argue that a living
trust saves the cost and time involved in getting a guardian appointed. However,
a durable general power of attorney can be used to manage the financial affairs
of an incompetent person in lieu of a living trust or a guardianship. A power
of attorney is less expensive than a living trust. Even if a guardian of
the person has to be appointed to make medical or residential decisions,
an attorney-in-fact appointed by a durable general power of attorney could
make decisions concerning assets and financial affairs.
CLAIM: Living trusts save time and money.
FACT: Living trusts often cost substantially more
than a will.
Proponents often argue that living trusts save
the time and money associated with probate, including court costs and legal
fees. In many situations, however, the decision whether to use a living trust
comes down to whether a person wants to "pay now, or pay later." There
are legal fees for setting up the trust and transaction costs involved in
transferring assets (such as fees for preparing and recording a deed to transfer
real estate into a living trust). In the worst case scenario, the result
is "pay now, and pay later." If all of the assets have not
been transferred to the trust prior to death, the person’s individually-owned
assets will have to go through probate anyway. The only person who is better
off in this situation is the attorney who gets to set up the trust and administer
More importantly, a grantor must spend his or
her own time and money in order to establish a living trust. Any potential
savings through avoidance of probate would only benefit his or her beneficiaries,
in what may be the distant future. In real economic terms, the initial costs
may be greater than any savings that ultimately are achieved. For example,
if a person pays $2,000 to establish a living trust at age 50 and dies at
age 75, the real cost of the trust is what an investment of $2,000 would
have earned during the intervening 25 years. Assuming a modest 5% rate of
return, the $2,000 would have grown to more than $6,700. Thus, the person’s
beneficiaries would have to save $6,700 in probate costs just to break even.
Even if someone sets up a living trust, he or
she still must have a will to transfer any assets that have not been transferred
to the trust prior to death. Also, in some states, such as Florida, a living
trust must be executed with the same formalities and witnesses as a will.
In addition, a person who establishes a living trust still should have a
power of attorney. In the event of incapacity, the power of attorney would
allow someone else to manage assets that have not been transferred to the
trust prior to the incapacity.
Living trusts also can cause administrative hassles.
After transferring assets to the trust, the grantor no longer owns the assets
in his or her own name. Even if the grantor is the trustee, many retail establishments
may be hesitant to accept a check from a trustee. In addition, it generally
is easier to make changes to a will, through an amendment or "codicil," than
to make changes to a revocable trust.
Some advocates argue that a trustee may distribute
the assets of a living trust on the day of the grantor’s death, whereas
an estate cannot be distributed until after the period allowed for creditors’ claims
has expired. However, immediate distribution of trust assets generally will
not be possible if, for example, the trust is responsible for paying the
grantor’s debts, funeral expenses, legal fees, or death taxes, or if
assets of the trust must be appraised for the federal or state estate or
CLAIM: Living trusts can be used to avoid creditors.
FACT: Living trusts cannot be used to avoid
During the lifetime of the grantor, assets in
a revocable trust are treated as owned by the grantor and, therefore, are
subject to the grantor’s creditors. A grantor may place a spendthrift
clause in a revocable trust so that a beneficiary’s interest in the
trust cannot be attached by the beneficiary’s creditors. However, the
same clause may be used in a will. Thus, a revocable trust provides no additional
protection from creditors. In fact, when a person dies with a will, creditors
have six months from the date of death to make a claim against his or her
estate, while the statute of limitations for making a claim against a trust
is three years--and it is not always clear when the three-year period commences.
Maryland also provides special protection for
certain assets owned by a husband and wife as tenants by the entirety. For
example, a creditor of only one spouse may not be able to seek satisfaction
of the debt from assets owned in tenancy by the entirety. This protection
is lost if the couple splits the property into tenancy in common interests
in order to transfer the property to their respective living trusts.
Advocates also argue that living trusts may be
used to decrease the amount that a surviving spouse is entitled to receive
from the deceased spouse. However, in Maryland, a surviving spouse is entitled
to a portion of the deceased spouse’s probate estate, and may also
be entitled to a portion of the property over which the decedent maintained
dominion and control during his or her lifetime. Because a grantor of a revocable
trust may alter or revoke the trust at any time prior to death, such assets
may be subject to the right of election of a surviving spouse.
CLAIM: Living trusts ensure privacy.
FACT: Living trusts do not ensure privacy.
With probate, the terms of a will, and the decedent’s
assets, become a matter of public record. Living trusts do not guarantee
that a person’s assets will remain free from public scrutiny. For example,
in order to open an account for the trust, many banks and brokerage firms
request that the grantor provide a copy of all or portions of the trust agreement.
In addition, if a living trust is subject to the Maryland inheritance tax,
a schedule of the trust assets must be filed with the Register of Wills,
and thus becomes public record. It may be possible, however, to keep the
trust document itself from becoming a matter of public record.
In certain limited situations, living trusts may
be useful estate planning vehicles. This may be the case if a person owns
real estate in more than one state, desires to have someone else manage his
or her assets currently, or anticipates a will contest. Nevertheless, in
most cases the immediate costs and administrative burdens involved in setting
up a living trust and transferring assets to it outweigh any potential savings
that may be realized by avoiding probate in the future.
A person considering a living trust should make
sure that he or she has all of the facts concerning the advantages and disadvantages
of these estate planning devices so that he or she may make an informed decision.
It also is important to determine whether a person advocating living trusts
is admitted to practice law in Maryland and practices in the field of estates
and trusts. It is wise to avoid mass-marketing advertising and high-pressure
This article has been developed jointly
by the Estate
& Trust Law Section and the Offices
of the Registers of Wills. The Section would like to thank Edwin G. Fee, Jr.,
Sheldon S. Satisky, Francis E. Yeatman, and Frederick R. Franke, Jr. for the
time and effort that they have contributed to this project.
of the Registers of Wills
The Registers also have available a "General
Guide to Estate Administration, and Probate
forms may also be downloaded from the Registers'.
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of Estate and Trust Law