The Shortfalls of Living Trusts
While living trusts can be helpful in certain situations, their usefulness is often limited.
This is a surprise to some people. Living trusts are often marketed to avoid probate and provide more control over the distribution of assets after death. However, living trusts have several shortcomings to be aware of.
1. Pennsylvania Inheritance Tax
One of the biggest shortcomings of living trusts in Pennsylvania is that they do not provide any protection from Pennsylvania inheritance tax. Pennsylvania has a unique inheritance tax system, which imposes a tax on transfers of property from a decedent to a beneficiary. The tax rate depends on the relationship between the decedent and beneficiary and can be as high as 15%. Unfortunately, even if you transfer your assets to a living trust during your lifetime, they will still be subject to Pennsylvania inheritance tax when you die.
2. No Medicaid Protection
Another common reason people create living trusts is to protect their assets from Medicaid if they need long-term care in a nursing home. However, in Pennsylvania, living trusts do not offer any protection from Medicaid.
Medicaid looks back five years from the date of application to determine if any assets were transferred for less than fair market value. If the transfer was made during that five-year period, it can result in a penalty period during which Medicaid will not pay for long-term care.
3. Cost and Complexity
Creating a living trust can be more expensive and time-consuming than creating a simple will. Unlike a will, which can be prepared in a short amount of time, creating a living trust involves transferring assets into the trust, which can be a complicated and time-consuming process.
Additionally, living trusts require ongoing maintenance, including funding the trust and making sure assets are titled in the name of the trust.
4. Limited Control
While living trusts can provide more control over the distribution of assets after death, they also limit the control of the grantor during their lifetime.
Once assets are transferred to the trust, the grantor loses direct control over them. The trustee of the trust is responsible for managing the assets and making distributions according to the terms of the trust.
5. No Asset Protection
Finally, it’s important to note that living trusts do not offer any asset protection. If you are sued or have creditors, assets in a living trust can be reached just as easily as assets held in your name.
In conclusion, while living trusts can be useful in some circumstances, they are not a panacea and may not be the best estate planning tool for everyone. Be sure to consult with an experienced estate planning attorney to determine if a living trust is appropriate for your individual needs and circumstances, or if better tools are available.