Disadvantages of a Revocable Living Trust in Maryland
Probate is the legal process of transferring assets to heirs and beneficiaries after a person’s death. Many people view a revocable living trust as a way to avoid probate. However, there are several pros and cons of creating a revocable living trust. Therefore, before deciding to create a revocable living trust, it is wise to discuss your estate planning goals and needs with a Maryland trust attorney.
How Do Revocable Trusts Work?
A grantor (the individual creating the trust) signs a trust agreement naming a person to act as trustee for assets transferred into the trust’s name. The grantor generally serves as the trustee for a revocable living trust. A successor trustee is named in the event the grantor becomes incapacitated or dies. The grantor may choose a person, bank, or trust company as successor trustee.
Funding the trust requires that the grantor transfer ownership of assets to the trust. The trust may hold title to real estate, vehicles, and other tangible assets. The trust may also become the owner of financial accounts, life insurance policies, liquid assets, and other property.
The trustee manages the trust property for the benefit of the grantor. The grantor retains the rights over the property during the grantor’s lifetime. The grantor may revoke the trust at any time. A grantor may modify the terms of the trust and remove or add property to the trust.
When the grantor dies, the trust becomes an irrevocable trust. The successor trustee steps in to manage the trust. Depending on the terms of the trust, the trustee may distribute the property to the trust beneficiaries outright and dissolve the trust. In some cases, the irrevocable trust may continue for the benefit of the beneficiaries.
What are the Advantages of a Revocable Living Trust?
Revocable living trusts have several advantages that make them useful estate planning tools. Benefits of transferring assets to a living trust include:
Avoid Probate Proceedings
Assets in the living trust do not become part of your probate estate. The assets pass directly to trust beneficiaries according to the terms of the trust. There is no need for court oversight or involvement.
Holds Real Estate Located In Other States
Bequeathing real estate through your Will creates more work for your heirs if the properties are located in different states. Generally, states require heirs to open a probate estate to transfer title to the real estate. However, if the living trust holds title to the real estate, multiple estates are not required.
Avoid Conservatorships
If you become incapacitated before death, a living trust can avoid a conservatorship. Instead, a successor trustee assumes control of the trust assets and manages the assets according to the trust’s terms. Thus, there is no need for costly, intrusive, and restrictive court-supervised conservatorship proceedings.
Immediate Access To Assets And Income
A revocable living trust can provide immediate resources for your loved ones after your death. The probate process can take months to complete. Your family members may not have access to assets and resources until the estate is officially opened and the court issues documents appointing a personal representative.
Retain Privacy
Probate proceedings are public record. Your Will, asset inventory, and other information are available to review by anyone. On the other hand, a revocable living trust is private. The terms of the trust are only known to the grantor, the trustee, and the trust beneficiaries.
Flexibility
Because you create, fund, and manage the living trust, you have the flexibility to create terms and conditions that meet your needs and desires. You can adjust the terms of the trust and remove or add assets. You continue to have access to the money and property held by the trust during your lifetime.
Continued Management Of Assets
Your living trust can continue after your death. You can control how the trust assets are used after your death and when income or property is transferred to the beneficiaries.
With a Will, your beneficiaries generally receive their inheritance within months after your death. You have no control over how your heirs manage their inheritance.
What Are the Disadvantages of a Revocable Living Trust?
Even though revocable living trusts offer benefits for estate planning and management of assets, you should also carefully consider the disadvantages of a revocable living trust in Maryland. Some of the “cons” of a revocable living trust could outweigh any advantages you might receive from transferring assets to a living trust.
The disadvantages associated with a revocable living trust include, but might not be limited to:
Asset Protection Is Not Guaranteed
It is a common misconception that a revocable living trust protects assets from creditors. During the grantor’s lifetime, creditors may sue to collect debts from the trust assets. They have the right to do so because the grantor maintains control over the assets during the grantor’s lifetime.
If a person is concerned with asset protection, they might want to consider an irrevocable trust. An irrevocable trust can protect assets from the grantor’s creditors. However, the tradeoff is that the grantor does not maintain control over the trust assets and cannot revoke the trust except under strict and extremely limited circumstances. Changes to the trust are not permitted.
You May Not Reduce Or Eliminate Estate Taxes
Many people believe that if they transfer their property to a revocable living trust, they can eliminate or reduce the estate taxes. An estate tax is an amount assessed on the right to distribute property to heirs upon your death.
Upon your death, the value of your estate is based on the fair market value of the assets you owned or had an interest in when you died. Because you had control and access to the property within the revocable living trust on the date of your date, the trust property is included in the value of the gross taxable estate. Therefore, the trust assets may be subject to estate taxes.
Costs Of Establishing And Funding The Trust
It can be expensive to set up a revocable living trust. It costs more to create a revocable living trust than it does to execute a Will in many cases.
Trusts require funding to be useful. After creating the trust, you must transfer assets into the trust’s name. You may incur the cost of preparing real estate deeds, vehicle titles, and other instruments to transfer title to the trust. There are also fees for filing these documents. You may also incur costs of changing beneficiary designations, preparing property assignments, and re-titling accounts to ensure that assets are transferred to the trust correctly.
Depending on your situation, you may also need continued advice from attorneys, financial advisors, and other professionals regarding the ongoing management of the trust assets.
You Need a Will and Estate Plan
A revocable living trust cannot hold certain types of assets. For example, interests in retirement plans and property owned by another person cannot be transferred to a living trust. Therefore, you must create a Will and estate plan to avoid assets being subject to Maryland intestate laws.
“Pour-over Wills” are designed to “catch” any assets you forget to transfer to the trust or cannot be transferred to a living trust. Therefore, you incur the costs of creating documents for trusts and estates instead of merely executing a Will.
Attacks by Beneficiaries and Heirs
Your heirs and beneficiaries may challenge a revocable living trust just as they can challenge your Will. Creating a living trust does not guarantee that your heirs will not attempt to undo your wishes or avoid family arguments.
Problems Refinancing Trust Assets
The trust holds legal title to real estate, vehicles, and other assets with a registration or title. If you wish to refinance a loan or use the assets as collateral, lenders may be hesitant to accept trust assets as collateral for a loan. Furthermore, the trust agreement must give you authority to borrow against the trust property.
Powers of Attorney
If you have a power of attorney, you need to review the document carefully to ensure that you did not give the power of attorney the right to change your revocable living trust. Most individuals do not want anyone to change the terms of their revocable trust but them. However, if you have an existing power of attorney, there could be language in the document affecting your revocable living trust.
Deciding Whether to Use a Revocable Living Trust as Part of Your Estate Plan
Our Maryland trust attorney helps you analyze the benefits and disadvantages of a revocable living trust. Depending on the size of your estate, priorities, and estate planning goals, the advantages of a living trust may outweigh the potential disadvantages. Additionally, there could be options other than a revocable trust that offers more advantages.
It is wise to consider all your options carefully before creating a revocable living trust. Once you transfer assets to a revocable living trust, it could be expensive to revoke the trust and undo the transfers. Moving and removing assets from a revocable living trust can significantly impact your estate plan.
Schedule a Consultation With Our Maryland Trust Attorney
Contact Steve today to schedule a consultation with an experienced Maryland trust lawyer. Let’s discuss strategies and solutions for protecting your loved ones and your property during your lifetime and after your death.
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