Disadvantages of a Revocable Living Trust in Maryland

Whether or not a revocable living trust is a good fit for a client depends on the client’s needs, their desires, their capabilities, their goals, their assets, their overall exposure to estate tax and liability and their family dynamic.

There is not a specific situation where a revocable living will would not be recommend, but it will sometimes be determined that it is not the best course of action. The decision to use a revocable living trust in Maryland is something that should be discussed with an experienced estate planning attorney.

Confusing Aspects of a Revocable Living Trust

The concepts involved in the creation and the management of revocable living trust can be complicated. Understanding that the document alone does not govern assets unless they are retitled into a trust, continuing to maintain the trust and the trust provisions throughout an individual’s lifetime; and then administering them correctly after death can be confusing.

For example, many individuals consider all of their assets to be theirs to use freely, but when a revocable living trust is in place their assets are actually in a different pot of funds. Although trust assets often can be used for the settlor, there may be a consequence to the estate planning in moving significant assets into and out of the trust. Sometimes, an individual does not realize that removing assets from the revocable living trust can affect their estate planning. Furthermore, estate planning is based on a settlor’s current titling of assets. If the titling of the assets change, the planning can be unintentionally affected.

Death Tax Savings and Revocable Living Trusts

A common misunderstanding about a revocable living trust is that assets that have been pre-funded into a revocable living trust avoid estate or death taxes.

The estate tax is a tax on the right to distribute property at your death. In Maryland, for decedent’s dying in the 2016 tax year, there is a $2,000,000.00 exemption per individual. The current federal exemption for the 2016 tax year is $5,450,000.00 per individual. The gross taxable estate to determine whether or not Maryland and/or federal taxes would be due generally includes all assets in an individual’s control on the date of his or her death.

At death, all assets are valued to determine the fair market value on the date of death. This means that real estate and business interests are appraised. Other assets, such stocks, money market accounts, checking accounts, and any other assets are reviewed to determine the fair market value as of the date of death. If that value exceeds either the Maryland estate tax filing threshold of $2,000,000 or the federal filing threshold of $5,450,000, then an estate tax return will need to be filed.

A common misunderstanding is that the revocable living trust assets avoid inclusion into the gross taxable estate. Revocable living trust assets are included in the gross taxable estate and may be subject to tax.

Charge of Cost

A revocable living trust is an additional document that is prepared for each spouse. There are some additional set up costs with the preparation of a revocable living trust because it is an additional document in an individual’s estate plan. In addition, in order for a revocable living trust to be effective, many assets of an individual have to be re-titled into the revocable living trust. There is a cost for the preparation of deeds. There are attorney’s costs to coordinate all of the beneficiary designation and account titling to ensure the revocable living trust has been properly funded.

Funding Concerns

A common misunderstanding is that creating a revocable living trust will govern all of an individual’s assets. Assets must be funded into revocable living trust for the trust provisions to govern those assets. This can involve contacting all banks, financial institutions, and brokerage houses to transfer the assets.

Additionally, deeds have to be prepared and filed for each of the decedent’s real estate assets. Often, it is recommended for clients to check with their mortgage company or their lien company to ensure that the transfer of real estate out of the name of an individual or individuals into revocable living trust do not trigger the due-on sale provision.

Finally, it is recommended that an individual check with his or her real property insurance carrier to make sure that they will continue to insure the property once it has been transferred into a revocable living trust.

Protection From Creditors

There are two ways that a trust can protect assets from creditors. One of the ways that trust can protect assets from the reach of creditors is by including a spendthrift provision. A spendthrift provision may prevent a beneficiary’s creditors from attaching the beneficiary’s share and it may also prevent a beneficiary from assigning his rights in a trust to a creditor.

Another way that Maryland law protects creditors is by allowing married couples to continue to enjoy the creditor protection that is inherently built into ownership as tenants by the entirety when assets have been distributed or funded into a married couple’s revocable living trust. For example, if a married couple owned their real estate as tenants by the entirety and they each created a revocable living trust, they could re-deed the real estate half into trust, half into the other and maintain the creditor benefits of that type of tenants by the entirety ownership.