Living trusts are sometimes hyped as an easy fix to several different estate planning problems at once. “Save money! Avoid probate! Ensure privacy!” At least in Maryland, these promises require qualification. Living trusts are sometimes more trouble than they are worth. They can be effective estate planning tools for some people, but you should be suspicious of anyone who claims that everyone in Maryland needs one.
A living trust is a trust that is created when the grantor (the person creating the trust) is still alive. It appoints a trustee, a person to manage the assets placed in the trust. For living trusts, the first trustee is usually the same person as the grantor. When the grantor becomes disabled or dies, the successor trustee takes over and manages the assets according to the instructions in the trust document.
Living trusts are helpful for disability planning because the successor trustee can pay bills and make investments when the grantor is unable to. In Maryland, however, it is cheaper and often just as effective to use a durable power of attorney. A living trust doesn’t eliminate the need for a power of attorney either, because the power of attorney is often necessary to move assets into the trust.
A living trust can control distribution of assets at death. In this sense a living trust acts as a “will substitute” and avoids probate. In reality however, it is extremely difficult to avoid probate altogether. Invariably, some property is left out and probate is required. A will can direct that any property left out of the living trust be placed into it. This ensures that everything is controlled by the living trust, but requires a will and at least some of the administration that comes with it.
In some states, probate is expensive and prolonged. California, New York and Florida have notoriously cumbersome and costly probate. Maryland is relatively painless. Maryland has streamlined procedures for small estates and certain other uncomplicated estates. Fees for Maryland probate (found here) are going to be less than the costs of setting up a living trust for all but the largest estates.
Living trusts do not help avoid taxes. They don’t reduce income tax, the Maryland estate tax, the federal estate tax or inheritance tax. There are ways to minimize taxes, often through the use of trusts, but living trusts don’t help on their own.
Living trusts are great tools for some people. If you own real estate in more than one state and your out of state real estate isn’t in a trust, your loved ones will have to open up a second probate proceeding where the real estate is located, called an ancillary probate proceeding. This can be a huge burden. A living trust can eliminate the need for additional probate in the other state. Living trusts can also be useful if a will contest is likely.
Want to read more? This “Living Trusts — Get the Facts!” pamphlet prepared by the Estates and Trusts Section Council of Maryland State Bar Association addresses several claims made by proponents of living trusts. This Washington Post article explains living trust scams.
A living trust might be right for you, but it will depend on your particular situation. Talk with your attorney about living trusts and to see if you need one for your estate plan.
Montefusco Estate Planning, LLC is an estate planning law firm in Frederick, MD. If you are interested in our services, contact us today. This information is written for the context of Maryland estate planning but is not legal advice for anyone. For more information, read our disclaimer.