December 18, 2018 – by Michael Gordon
We have been publishing these articles based upon questions we receive on a regular basis, and this one is written based upon a question which came in today from a client who has been served with a complaint issued through a local court dealing with an auto accident in which she was involved. She called to say he needed a revocable trust to make sure that her assets were not affected by this lawsuit since the amount being demanded was more than her auto insurance limits. Unfortunately, I had to explain to her that even assuming she created the revocable trust and placed her assets in the ownership of the trust, the assets were still hers and could still be reached by a creditor. I explained to her further that there were many scenarios in which she could move title to assets in order to attempt to protect them from creditors but, as far as the lawsuit with which she had just been served, to do so now would likely be deemed to defraud creditors and would be of little benefit to her. One can create a comprehensive asset protection plan, but a revocable living trust to hold title to assets would not likely be a part of that plan.
A recent call from another client dealt with his concern for simplification. While a transfer of title to assets to a revocable living trust will ease the transfer of assets as opposed to probate, it will not totally eliminate these efforts. Usually, assets show up that are not in the Trust and must go through, at least, some form of Probate. For instance, tax refunds, insurance premium refunds, cars and personal property not titled to the Trust, etc. The trustee will have numerous responsibilities to fulfill before completing a transfer and Trust assets and these will be dictated by the terms of the trust. Many trusts do not provide for an immediate transfer of assets to a beneficiary. Indeed, many trusts are created so as to avoid that immediate transfer, and often the same result can be obtained by creating a trust in a will to become effective only upon the death of the maker. Thus, desired results can be obtained without the necessity of living with that trust and the additional burdens that entails.
So, why have a Living Trust? The big benefit having a living trust in place is that if there are to be immediate transfers, the trustee will not be bound by the time limits placed upon a personal representative to accomplish certain tasks under a will. And, assets passing under a trust do not have to be accounted for in the same manner as assets passing through probate.
Another misconception is that a revocable living trust will obviate the necessity of having to pay estate and inheritance taxes. While proper planning can reduce taxes, should they be payable at all, a revocable living trust is not usually a part of that plan. If someone inherits as a named beneficiary of the bank account or as a co-owner of a bank account or other property, responsibility for inheritance taxes, if any, is no different. Simply, the manner of reporting differs. Under the current tax laws, none of the people with whom I talked who raised the questions noted have enough assets to worry about federal or state estate taxes and, in Maryland, there are no inheritance taxes between individuals and their parents, grandparents, or children, grandchildren, etc. Nor are there any between siblings. It’s everyone else you have to worry about. And, if inheritance taxes would be payable in probate, they are still going to be payable with a revocable living trust.