Is a Family Trust Right for You?

When people talk about creating a “family trust,” they usually mean a revocable trust — an estate-planning tool that can hold assets during your lifetime and direct how those assets are distributed after your death.

What Is a Revocable Trust?

A revocable trust has two primary functions: to hold, manage and distribute your assets during your lifetime, and to distribute those assets after your death. As the name suggests, you can change or revoke the trust at any time, much like a will. Your trust can specify who receives your assets and whether they receive them outright or through a continuing trust.

A revocable trust isn’t a complete estate plan. It typically works alongside a will, financial power of attorney, medical power of attorney and beneficiary designations.

Why Create One?

Planning for incapacity. While you’re healthy, you typically serve as trustee and remain in control of the assets in the trust. If you become incapacitated, a person you’ve chosen can step in to manage those assets and pay your bills without a court-appointed guardian. This can help keep matters moving without court involvement.

Avoiding probate. A common reason for creating a revocable trust is to avoid probate — the court-supervised process for transferring assets after death. In Pennsylvania, however, probate generally is not as difficult, so avoiding it isn’t always necessary for all estates.

Owning property in another state. Real estate outside your home state may be subject to separate, or ancillary, probate. For example, a Pennsylvania resident who owns real estate in New York could face a second probate proceeding there. Transferring the property by deed into a revocable trust can avoid that.

Providing for loved ones. A trust can establish continuing trusts after your death for a spouse, minor children or other beneficiaries. This can help protect assets and provide for beneficiaries over time.

Privacy. Unlike a will, a revocable trust isn’t automatically filed with the court and generally isn’t part of the public record. That privacy can disappear, however, if a beneficiary or family member challenges the trust.

Should You Fund Your Trust?

If avoiding probate is one of your goals, yes. A revocable trust must be funded during your lifetime to accomplish that goal. Otherwise, the trust exists, waiting for assets to be transferred at death — potentially through your will or a beneficiary designation.

Funding means changing ownership of assets from your individual name to the name of the trust. Assets that may be transferred include investment and checking accounts, real estate, business interests and valuable collectibles.

Some assets generally cannot be transferred during your lifetime, including jointly owned assets and retirement accounts such as IRAs, 401(k)s and pensions.

Will It Save Pennsylvania Inheritance Tax?

No. Assets held in a revocable trust remain fully subject to this tax at death. In general, the only way to reduce Pennsylvania inheritance tax is to make qualifying gifts more than 365 days before death.

Will It Make Things Easier?

Sometimes, but not necessarily. Pennsylvania financial institutions generally require an Inheritance Tax Clearance Certificate before a trustee or beneficiary can control funds in an account titled to a revocable trust or subject to a beneficiary designation. Obtaining those certificates can take more than a month.

Even when probate is avoided, the trustee still must perform many of the tasks an executor would handle. Avoiding probate doesn’t necessarily mean avoiding paperwork, administrative responsibilities or delays in distributing assets.

Is a Revocable Trust Right for You?

There’s no universal answer. It depends on your financial and family circumstances, which can change over time. A revocable trust isn’t the solution for everyone.

For someone with a simple estate, a well-drafted will, beneficiary designations and a financial power of attorney may provide an efficient plan. For others — particularly those with out-of-state real estate or more complicated family circumstances — a funded revocable trust may be preferable. It all depends on your goals and circumstances.

An estate-planning attorney can help you evaluate your circumstances, explain the advantages and limitations, and determine which approach makes the most sense for you.

The opinions expressed in this article are for general information purposes only and are not intended to provide specific legal advice or recommendations.

Stephanie Pahides Kalogredis, Esq. concentrates her practice in Estate Planning, Wealth Transfer and Succession Planning along with Estate and Trust Administration as Chairman of the Estate Department at Lamb McErlane, PC’s West Chester location. More at LambMcErlane.com.