ESTATE PLANNING: Introduction to Revocable Living Trusts
 

There is a recurring debate among elder law attorneys and other lawyers who regularly prepare estate plans. We could label the two "sides" as the Everyone-Needs-A-Revocable-Living-Trust clique and the Revocable-Living-Trusts-Are-All-Hype contingent. As usual, the truth lies somewhere in the middle.

In most cases, a simple will is an adequate estate planning vehicle for a person who resides in Maine. There are circumstances, though, when a revocable living trust should be considered. And there is at least one set of circumstances when the revocable living trust would likely defeat the client's goals.
 

A revocable living trust is just what the name implies - a trust created during an individual's life that can be changed or terminated at any time. The individual who creates this inter vivos trust is called the grantor, the trustor or the settlor. During his or her life, the grantor is typically also the trustee of the trust as well as the primary beneficiary of the trust.
 

There are very legitimate reasons for creating revocable living trusts, but some promoters give the impression that living trusts can solve every real and imaginable estate planning and financial problem, eliminating estate tax and income tax, barring creditor's claims, preventing challenges from individuals who have been disinherited, and protecting assets from nursing home expenses. None of these are true.
 

One thing that the revocable living trust can do - and the reason why it is often used in states which (unlike Maine) have not adopted some form of the Uniform Probate Code -is to avoid "probate," the legal process by which assets owned by a decedent are transferred upon death. This process includes the validation of the decedent's will, appointment of a personal representative to administer the estate, collection and inventory of the assets of the probate estate, notification and payment to creditors, and distribution of the property and assets to the decedent's heirs and devisees.
 

Keep in mind that not all assets are subject to the probate process. For instance, if beneficiaries have been designated in life insurance policies, annuities, and 401(k)s, those assets will pass upon the decedent's death to the beneficiary. Likewise, jointly owned bank accounts and assets pass to the surviving joint owner upon death.
 

The revocable living trust will avoid probate only if the trust is funded after it is created. The individual must actually change the title of ownership of each asset that will be placed in the trust from his or her name to ownership by the trustee of the trust. Merely setting up a trust agreement does not place any property into the trust. A separate transaction is needed for each asset. And a will is still necessary. An estate plan built on a revocable living trust typically includes a so-called "pour over" will that, upon the testator's death, collects and transfers to the trust all the assets that were not transferred to the trust during life. The trust becomes irrevocable upon the grantor's death.
 

Maine adopted a version of the Uniform Probate Code, which became effective on January 1, 1981. The probate process is efficient, and probate costs are usually minimal. One benefit of having an estate go through probate is the statutory provisions that cut off the claims of creditors. So, in and of itself, "avoiding probate" is generally not a sufficient justification for creating an estate plan built on a revocable living trust.
 

When any of the following are true, though, it is appropriate to discuss the benefits of a revocable living trust as the primary estate planning vehicle:

1. Real Estate Outside of Maine: If the client owns real estate in other states, he or she may want to avoid the necessity of having to probate each parcel in the separate states. In that case, use a revocable living trust to consolidate title to all the real estate and eliminate the need for probate in more than one state.

2. Need for Privacy: If the client has a particular need or desire that his or her estate plan be private, the revocable living trust is one way to accomplish this. A will is a public document once it is probated; a revocable living trust is not probated.

3. Mobile Clients: If the client anticipates relocating but does not know where, a revocable living trust may be appropriate in the event that the state in which the client ultimately dies is one where probate is unusually complex and expensive.

There is one circumstance, though, when a revocable living trust should definitely not be considered. When a client anticipates illness and a likelihood of applying for MaineCare nursing home or assisted living benefits, be aware of Section 3330.24 (II) and (III) of the MaineCare Eligibility Manual.

First, in most cases the primary residence of a MaineCare applicant is an exempt asset. Its value is not considered when determining an applicant's financial eligibility for MaineCare if it is located in Maine and if there is either a community spouse or an "intent to return home" by the institutionalized individual. But, effective as of September 1, 2002, if the primary residence is transferred to a revocable living trust it will no longer be exempt "because the property is not owned by the individual." Section 3330.24 (II) at p. 125.
 

Second, there is a quirky transfer rule that makes revocable living trusts a potential problem. When an individual creates a revocable trust and then transfers assets into that trust, those transfers are not subject to the transfer penalty calculation. (See #7 below.) That is because the asset is still available to the individual. But any distributions from the trust to anyone other than the individual (or the individual's spouse) are transfers, and the lookback for transfers from a revocable living trust is 60 months as opposed to 36 months.
 

In summary, there is no one-size-fits-all estate plan. Whether you need a revocable trust as a component of your estate plan depends on your individual circumstances. If you would like to provide for a smooth transition of management of your affairs when you no longer can manage assets for yourself, or if your assets are such that probate of your will may become complicated, you may wish to consider a revocable trust. If you have children and grandchildren or others for whom you would like to set up a trust, you can begin during your lifetime by establishing a revocable trust that allows for distributions to your chosen beneficiaries. On the other hand, if your estate is limited and you have provided a power of attorney so someone can act for you with respect to financial affairs, or if you do not wish to get involved in the bookkeeping required for trust management, a revocable trust may not be for you. When planning for the management of your assets during your life in the event of incapacity and for the protection and distribution of those assets upon your death, work with an experienced attorney who will take the time to learn about your individual circumstances, your family, your finances, and your goals.