Do I Need a Trust? Understanding When a Trust Fits Your Estate Plan

Weston P. Pesillo, wpesillo@tuckerlaw.com, (412) 594-5545

One of the most common questions I receive from clients is whether they need a trust as part of their estate plan. The answer is not always straightforward.

Many clients come to their initial meeting convinced that they need a trust because a friend, family member, or colleague recommended one. Others believe that trusts are only for the ultra-wealthy and have no place in their own “modest” estate plan. In reality, neither assumption is necessarily correct. Whether a trust is advisable depends upon the individual’s goals, assets, family circumstances, and overall estate planning objectives.

Generally speaking, trusts fall into two broad categories: revocable trusts and irrevocable trusts.

A revocable trust, sometimes referred to as a living trust, may be amended or revoked by the grantor at any time during the grantor’s lifetime. Because the grantor retains complete control over the trust and its assets, a revocable trust is often considered the grantor’s alter ego for legal and tax purposes.

An irrevocable trust, by contrast, cannot generally be amended or revoked by the grantor once it is established and funded. By relinquishing control over the transferred assets, the grantor may be able to achieve certain tax, asset protection, or long-term care planning objectives that are not available through a revocable trust.

Benefits of Revocable Trusts

Revocable trusts are often recommended for several reasons.

First, they can be an effective tool for probate avoidance. Assets properly titled in the name of the trust generally pass outside of probate at the grantor’s death. In some jurisdictions, probate is timely and expensive, and thus use of a trust to avoid probate in these jurisdictions can provide significant time and cost efficiencies. In Pennsylvania, however, clients should understand that the costs associated with establishing and administering a revocable trust are often comparable to the costs of a probate estate. As a result, probate avoidance alone may not always justify the creation of a trust. One notable exception is when a client owns out-of-state real estate. In those circumstances, transfer of the out-of-state real estate into a revocable trust can help avoid an ancillary probate proceeding in the state where the property is located.

Second, revocable trusts can provide valuable incapacity planning. The trust agreement designates a successor trustee who can immediately step in and manage the trust assets if the grantor becomes incapacitated. This can provide a seamless transition in management without the need for court involvement.

Third, revocable trusts can promote administrative efficiency at death. Upon the grantor’s death, the successor trustee generally has immediate authority to access and manage trust assets. By contrast, an executor of a probate estate must first petition the appropriate court and obtain legal authority before taking control of the decedent’s property and assets.

Finally, revocable trusts offer a degree of privacy in comparison to a probate estate. Trust administration is generally conducted privately, whereas probate proceedings are matters of public record.

Benefits of Irrevocable Trusts

Irrevocable trusts serve a different set of planning objectives.

For high-net-worth individuals, irrevocable trusts are commonly used for estate tax planning. By transferring assets out of the grantor’s taxable estate, an irrevocable trust may help reduce or eliminate federal estate tax exposure for estates that exceed the applicable federal estate tax exemption amount.

Irrevocable trusts can also be valuable asset protection tools. Because assets transferred to a properly structured irrevocable trust are no longer owned by the grantor, those assets may be protected from the claims of the grantor’s future creditors. Asset protection planning is often utilized by individuals in professions with heightened liability exposure, business owners, real estate investors, and others seeking to preserve wealth for future generations. It is important to note, however, that asset protection planning must be implemented proactively. Transfer made with the intent to hinder, delay or defraud existing creditors may be subject to challenge under applicable fraudulent transfer laws. Accordingly, irrevocable trusts are generally most effective for asset protection when established well before any creditor issues arise and as part of a comprehensive long-term estate and financial planning strategy.

Lastly, and related to asset protection, irrevocable trusts are also frequently used for Medicaid and long-term care planning. When properly structured and funded sufficiently in advance, assets transferred to an irrevocable trust may no longer be considered part of the grantor’s countable estate for Medicaid eligibility purposes. In addition, assets held in the trust may be protected from the Medicaid estate recovery process following the grantor’s death.

Conclusion

Trusts are valuable estate planning tools, but they are not a one-size-fits-all solution. Some clients benefit greatly from a revocable trust, while others may be better served by an irrevocable trust or a more traditional estate plan centered around a will, powers of attorney, and beneficiary designations.

The decision whether to establish a trust should be made only after careful consideration of the client’s assets, family dynamics, tax considerations, long-term care concerns, and overall planning goals. What works well for one individual may be unnecessary—or even counterproductive—for another. For that reason, trust planning should always be evaluated on a case-by-case basis.

If you have questions about your estate plan or want to explore whether a revocable or irrevocable trust makes sense for your situation, contact Weston Pesillo at wpesillo@tuckerlaw.com or (412) 594-5545 to schedule a consultation.