In Pennsylvania, there are common misconceptions surrounding the creation and benefits of placing your assets in a trust. I often have clients come to me for succession planning requesting the creation of a trust. My first question is always why do you want to transfer your assets into a trust? Many of the responses I receive are “because my neighbor has one” or “isn’t that the safest way to protect your assets from creditors”? Clearly, the neighbor is not an estate attorney, and the client has been misinformed on how a trust can protect their assets. Many individuals in other states benefit significantly from having their assets in a trust. In California for example, the probate process is (1) arduous, as multiple hearings are required; (2) expensive, California lawyers are not cheap; and (3) lengthy, many probates in California are known to take years. The Pennsylvania probate process is much simpler, less expensive, and faster which is why it is wiser to have your assets transferred through a will rather than a trust in most circumstances. Here are a few things to know before placing your assets in a trust:
- There is a misconception that trusts can somehow save your estate from paying Pennsylvania inheritance taxes. However, that is not true. All assets, except for life insurance and a few other exemptions, are subject to Pennsylvania inheritance tax regardless if those assets flow to the beneficiaries through a trust, will, or by beneficiary designation through a paid on death account.
- Only irrevocable trusts can protect your assets from being seized by creditors. Irrevocable trusts are just how they sound, the settlor of the trust cannot remove assets placed in this type of trust under any circumstances. However, the settlor can transfer assets into an irrevocable trust at any time. With that said, if the settlor received Medicaid payments, any assets transferred into the irrevocable trust within five years from the date of death are subject to attachment. Because of the limitation on removing assets from an irrevocable trust, they are rarely used in Pennsylvania.
- Trusts are expensive to prepare, manage, and execute. A complete trust package can run a client into the thousands. Additionally, the settlor needs to actually “fund” the trust. Deeds to real estate, bank accounts, and any other assets that hold title need to be transferred into the trust’s name. Depending on the number of assets that need to be transferred, this step can be extremely costly. Additionally, while the assets in a trust flow directly to its beneficiaries, an inheritance tax return, the REV-1500, still needs to be prepared by an estate attorney or CPA, adding an additional expense to its administration. Moreover, the trustee of a trust is entitled to take a fee for managing the trust.
Estate planning is necessary for all individuals to ensure their wishes are met, whether through a will or trust. While trusts often allow assets to be transferred more expeditiously to their beneficiaries, they come at a price and might not be the right fit for your estate planning goals. A wise course of action is to clearly delineate your goals then find the best estate planning vehicle that helps you achieve them.