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Wills and Estates Blog

Revocable Living Trusts: Are They Worth the Hype?

Thursday, September 22, 2016

In many states, the use of a Revocable Living Trust has become increasingly popular as a viable estate planning option. But in Maryland, the ease of the probate process, among many other reasons, makes this option usually not worth the hype, money or time.

A Revocable Living Trust is a written document that contains provisions of how to hold, manage, and distribute property during your life and after your death. It is revocable, meaning that even though assets are transferred (or re-titled) to the living trust, the person who creates the trust, the grantor, can get his or her property back by revoking the Trust during his or her lifetime. The persons who manages the assets in the Trust is the Trustee and this is almost always the grantor during his or her lifetime. The primary purpose of a Revocable Living Trust is to avoid probate. It is most popular in states with probate systems which are expensive and time consuming.

In Maryland, the advantages of having a Revocable Living Trust are typically outweighed by other estate planning alternatives and the ease of the Maryland probate system. After a person's death and once the probate documents are filed in Maryland, a personal representative can be appointed within days and the Letters of Administration can be used to access funds and manage probate assets. In addition, the costs associated with probating an estate are modest with probate fees depending on the size of the probate estate. For example, an estate of $200,000 would have a probate fee of$400.00. Unless there is some complicating matter, many estates can be closed after 6 months which is the period that creditors have to make claims against the estate.

Despite the ease of the Maryland probate process, many who have heard of the evils of probate will still insist on a Revocable Living Trust, and for them, the following information should assist them with making an informed decision.


  1. Avoiding Probate

    Upon your death, assets that were titled in the Revocable Living Trust pass directly to the Trust without going through probate. This is particularly important if you own real estate in more than one state because without a trust, your loved ones would have to open a probate estate in each state real property is located. In addition, a Revocable Living Trust allows immediate access to bank accounts titled in the Trust after your passing, instead of waiting for the documentation from the probate estate to gain access to the account(s). Lastly, the decedent's affairs could theoretically be finalized in weeks or months as there is no 6 month creditor claims period. Note that this may in fact also be construed as a disadvantage because creditors may have three years to file a claim against assets that were in the trust.

  2. Management of Assets

    Should you become ill or incapacitated, some argue that it is easier to manage Trust accounts versus accounts in your individual name. If your assets are held in a trust account and you become incapacitated, the Trust document outlines the Trustee's power with regard to managing your assets. Financial institutions will require your trustee to provide a copy of the Trust Agreement.

    For accounts held in your individual name, a properly executed Power of Attorney will allow your agent to control those assets. Although recent changes in the Maryland law regarding Powers of Attorney should make it easier to use a Power of Attorney, some may still find it difficult to use POAs with certain financial institutions.

  3. Privacy

    Unlike a Last Will and Testament, upon your death a Revocable Living Trust is not public record. Therefore, information as to what you owned and how you dispose of those assets are private. Thus, your beneficiaries and the amounts they receive are not available for public scrutiny.

  4. Avoiding Multi State Probate

    The most compelling reason for a Revocable Living Trust is to avoid probate in multiple states if you own real estate outside of your home state. In this instance, your Last Will and Testament must generally be probated in your home state and the state for which you own real property, a process which is called "Ancillary Probate." If your real property is titled in your Living Trust, this will not be necessary. Your real property can be distributed by your Trustee, upon death, no matter where it is located.


  1. A Last Will and Testament is Necessary

    Invariably, not all of the assets will have been re-titled in the name of the Revocable Living Trust before death. There will be a bank account or vehicle that was still in the decedent's name at the time of death. Thus, a Will is still necessary. Most attorneys will draft a special type of Last Will and Testament called a Pour Over Will to ensure that any unfunded assets (assets not re-titled) will "pour" into your trust. To do this, your Pour Over Will must also be probated, and such assets may then be distributed according to the instructions in the Trust.

  2. Initial Expense is High

    It is more expensive to create a Revocable Living Trust than a Last Will and Testament. Preliminarily, there is the initial cost of drafting a Trust Agreement, which is usually more than the price for drafting a Will. There is also the expense of "funding" the Revocable Living Trust. This is the process of transferring the ownership of every eligible asset into the name of the Trust. In addition to just the time spent on this process there may be costs associated with retitling assets. For example, real property can only be assigned to a trust by deed, which must be recorded at the applicable office of land records for a fee. This fee includes the time and cost for the attorney or titling company to draft the deed and the fees to record the deed.

  3. Funding a Trust Takes Time and Effort

    Once your Revocable Living Trust becomes effective, you must fund the Trust by contacting financial institutions, life insurance companies, and transfer agents to change account ownership and beneficiary designations; retitle vehicles, and sign and record new deeds for real estate. There is a significant cost – in terms of time – to accomplish this. If you fail to re-title, even one asset of any significance, your trustee, upon your death, would have to open an estate to administer such assets. This would defeat the purpose of the Living Trust.

  4. Cannot Avoid Tax

    Although assets that are retitled to the Trust avoid probate, they are still subject to income and estate taxes. This is because the IRS still considers that all the assets in the Revocable Living Trust are still yours. This should not be surprising as you are the trustee of the trust, the beneficiary of the trust, and can revoke it at any time. Because it is still considered your money, you and/or your estate are still responsible for income, estate, and inheritance taxes. There is simply no tax advantage to having a Revocable Living Trust over a Last Will and Testament.

    The next time you hear someone tell you that a Revocable Living Trust is a must, please consider all of the pros and cons as they specifically apply to your situation. While there are cases where a Revocable Living Trust can be beneficial, for most Maryland residents there are other legal avenues to accomplish your goals without the cost and effort of a Revocable Living Trust.

Beneficiaries Instead of Probate: Use Caution

Tuesday, September 20, 2016

The term “probate” refers to the court process whereby a decedent’s assets are gathered together and, after the payment of the decedent’s debts, distributed to the decedent’s heirs. One way to avoid probate is through the use of beneficiary designations. The only assets that pass through probate are assets the decedent owned in his or her sole name without any beneficiary designations. Any asset that contains a beneficiary designation passes directly to the beneficiary without any court intervention. Life insurance is a classic example of an asset that passes directly to the beneficiary. Retirement plans (e.g. IRAs, 401ks) also usually pass to a designated beneficiary. Other examples are “pay on death” designations on bank accounts or investment accounts.

The beneficiary designations must be considered as a part of your <em>entire</em> estate plan. When drafting your Will you should be cognizant of the probate assets (i.e., assets which will actually be governed by the Will) and also the beneficiary designated assets that pass directly to the beneficiaries. For example, in your desire to treat your children equally, you draft your Will to split up the assets in equal shares between your children. Your desire for “equality” can be destroyed if you also have a large IRA that passes directly via beneficiary designation to only one of your children. Thus, it is imperative that when drafting a Will the beneficiary designations are considered.

It is also important to note that even though the assets pass directly to the beneficiary, these assets are still a part of the your taxable estate. The beneficiary designated assets will be counted, along with the probate assets, to calculate the total taxable estate. Often these beneficiary designated assets, such as life insurance, can be enough to cause the imposition of estate taxes. In Maryland, a $500,000 life insurance policy can turn an estate with a $600,000 house into a taxable estate.

In addition to the unexpected tax liability, the beneficiary designated assets can cause some unfair distributions. For example, let us say that your first child is the beneficiary of a life insurance policy which is about half of your total estate. Knowing this, you draft your Will and give your house, the bulk of your probate estate, to your second child. While this may seem like a fair distribution, it is fraught with problems.

First, what if at some later point you cancel your life insurance and don’t execute a new Will? Your first child has been disinherited. Second, what if the housing market takes a turn and the house, which is the primary part of the probate estate, is worth practically nothing at your death. Your second child is then effectively disinherited. Finally, most standard Wills indicate that the estate should pay all the inheritance and estate taxes prior to the distribution of the estate assets. In this scenario, your second child, inheriting under the Will, ends up paying all of the estate taxes and your first child, receiving the life insurance, will have no tax liability.

Stay tuned for Part Two – Beneficiaries to Avoid!

5 Important Facts About the New Estate Tax

Thursday, September 15, 2016

In December 2010 Congress enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law created an entirely new estate tax regime. To understand the extent of the change, it is important to remember where we were prior to the new law.

In 2009, the maximum federal estate tax was 45 percent and the maximum amount that one person could give away without estate tax (exclusion amount) was $3.5 million. Estate planners believed that a new law would have been enacted before the end of 2009 because the then current federal estate tax law was due to expire by the end of the year. Congress did not act and, thus, in 2010 there was no estate tax. This meant that no matter how much money there was in the estate, there was no tax in 2010. No doubt this was good news for George Steinbrenner’s heirs!

So why did Congress finally enact a new law in 2010 - when they couldn’t seem to manage it in 2009? As opposed to the absence of an estate tax in 2010, the prior estate tax law was written in a way that would bring back more excessive estate taxes in 2011. If Congress failed to act in 2010, the maximum federal estate tax would be 55% (an increase from 45% in 2009) and the exclusion amount reduced to $1 million per person (from $3.5 million in 2009) beginning in 2011.

1. Change In Exclusion Amount

In 2011 the new exclusion amount ( the amount any one person can give away without estate tax) is now $5 million. This is a significant increase from both the 2009 level ($3.5 million) and the level we would have been at in 2011 had congress not acted ($1 million.)

2. Change in Tax Rate

The new maximum estate tax rate on the amount in excess of the exclusion is 35% in 2011. This rate is significantly reduced from 2009 (45%) and what it would have been without a new law (55%).

3. Portability of Spousal Exclusion

For the first time in the history of estate taxes, an unused spousal exclusion can be used at the second spouse’s death. Under estate tax law (both old and new), the exclusion amount does not apply to spouses. Thus, the first spouse to die can give all their property, no matter the amount, to his or her spouse without estate tax. This created a problem. The spouse that died first lost the ability to give away the exclusion amount because he or she had given away all of their property to their spouse.

This problem is better understood by example. Under 2009 law ($3.5 million exclusion), husband dies and gives $7 million to his wife. There is no estate tax because of the unlimited spousal exclusion. When wife dies, under 2009 law, she could give away $3.5 million tax free. Her estate will be subject to estate tax on the remaining $3.5 million (assuming she had not spent the $7 million of course). Under the new law, wife has the ability to use her husband’s unused spousal exclusion of $3.5 million when she dies. In this scenario, there would be no estate tax due.

Currently, estate planners use trusts to prevent the loss of the first-to-die spouse’s exclusion amount. These trusts are often referred to as bypass or credit shelter trusts. Should these portability provisions survive the test of time, the use of these trusts as tools to prevent the loss of the exclusion may decline.

4. Sunset Provision

Unfortunately, the new estate tax law (just like the prior version) has a sunset provision. If Congress does not enact a new estate tax law within two years, we return to a much more severe estate tax. Thus, in 2013, the maximum tax rate would be 55% and the exclusion amount would be $1 million. Importantly, the spousal exclusion portability provisions will also expire. Consequently, only if <em>both</em> spouses die in the next two years will they be able to take advantage of the new portability provisions.

5. Don’t Forget your State

Regardless of Congress’s actions (or inactions), both Maryland and the District of Columbia have their own state estate taxes. The exclusion amount in both jurisdictions is only $1 million. In our local area estate tax planning may still be needed regardless of the new federal estate tax provisions.


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