A common question often asked by clients during an estate planning conference concerns the advantages and disadvantages of using a Revocable Trust as opposed to a Will for estate planning purposes. This article will compare and contrast the advantages and disadvantages of both instruments and will review how the new Maryland Modified Probate Procedure may affect a client's choice.
A Revocable Trust (sometimes known as a Living Trust) is a Trust established during life by an individual to which the individual transfers all of his or her assets. The three main advantages typically given for using a Revocable Trust are:
- Assets transferred to the Trust avoid the time and expense of probate;
- The Trust allows a successor trustee to manage the grantor's assets if the grantor becomes incapacitated, thereby avoiding the expense of guardianship proceedings; and
- The Trust is a private document, not filed in the public probate records like a Will.
In contrast to a Revocable Trust, a Will is a testamentary document that only becomes effective at death. The main advantage of a Will is that it does not require an individual to re-title and transfer all of his or her assets. The Will is a public document filed among the probate records (which records are open to the public), whereas a Revocable Trust is not filed. A Will does not help an individual who becomes incapacitated, since a Will is not effective until death.
At first glance it would appear that the distinctions between a Revocable Trust and a Will would make the Revocable Trust an easy choice. Upon closer examination, however, the probate avoidance advantage of a Revocable Trust has been lessened by the new Maryland Modified Probate Procedure.
The new Maryland Modified Probate Procedure has simplified probate in Maryland by eliminating the expensive and tedious accounting procedures of a regular probate. If an estate qualifies for a modified probate, the advantages of a Revocable Trust in the area of probate avoidance is decreased. An estate will qualify for modified probate if the decedent was a Maryland resident dying after January 1, 1998. In addition, the decedent's residuary beneficiaries may only consist of one or more of the following people: spouse, children and personal representative (who can be anybody). The decedent may still leave specific bequests to other people or organizations. If the estate qualifies, the personal representative can elect a modified probate. Any residuary beneficiary may object at any time, and the estate will be transferred back to the regular probate process. No accountings are required, and the assets must be distributed within nine (9) months from the date the estate is opened.
Consequently, if an estate qualifies for a modified probate, much of the probate process that before could only be avoided by use of a Revocable Trust can now be avoided even with a Will by electing a modified probate. In fact, the initial steps of the modified probate procedure must be taken by all estates, whether a Will or Revocable Trust is used. This is because a decedent dying with a Revocable Trust must still file a "pour-over will" to open an estate and to transfer any assets into the Revocable Trust that were not transferred during life. In addition, an information report will need to be filed for all estates with the State of Maryland. The information report is required so that the Register of Wills can determine if any inheritance tax is due from the estate. The bottom line is that an estate qualifying for a modified probate must basically follow the same procedure whether or not a Will or Revocable Trust is used.
If, however, an individual has real property in more than one state, the Revocable Trust still has a distinct advantage over a Will. If an individual transfers all of his or her real property to a Revocable Trust, the Revocable Trust will avoid the necessity of opening an ancillary probate proceeding in every state where the decedent owned real property.
The second claimed advantage of using a Revocable Trust, namely, avoiding a guardianship proceeding for an incapacitated individual, can also be accomplished by a well drafted financial power of attorney. A financial power of attorney will avoid the necessity of requesting the court to appoint a guardian for an incapacitated individual. In fact, a financial power of attorney is usually part of any estate plan whether or not a Will or a Revocable Trust is chosen. This is because if a Revocable Trust is chosen, the individual will need to give a financial power of attorney to someone so that any assets acquired during the grantor's incapacity can be transferred to the grantor's Revocable Trust. Although some institutions may prefer to work with a trustee under a Revocable Trust, the Maryland law protects institutions that honor a financial power of attorney. It is always a good idea to present a financial power of attorney to any institution holding your assets in advance so they can keep a copy on file and so any forms the institution requires in connection with a financial power of attorney can be completed.
There are also similarities between a Will and a Revocable Trust. Both a properly drafted Will and Revocable Trust will contain tax provisions that permit an individual to utilize any remaining credits he or she may have against federal estate taxes. One important misconception some people have about a Revocable Trust is that it avoids inheritance and estate taxes. This is not true, as all of the assets transferred by either instrument will be included within the estate of the decedent for tax purposes. In addition, both a Will and Revocable Trust are used to direct the disposition of assets upon the decedent's death. Moreover, both instruments can also be used to leave assets in trust for beneficiaries. Finally, both instruments can be amended or revoked during life.
In conclusion, the advantages of a Revocable Trust over a Will may no longer be as great for Maryland residents due to the new Maryland Modified Probate. However, if an individual is concerned about privacy or has real estate holdings in several states, the Revocable Trust still provides advantages that a Will cannot provide. In choosing between a Will or Revocable Trust each individual should discuss his or her estate planning desires with an estate planning attorney, who can help choose which instrument is best for that person.