If you have ever listened to a national financial podcast or read a popular finance blog, you have likely heard that a revocable trust is a “must-have” to avoid the supposed nightmare of probate. However, estate planning is not one-size-fits-all. While these trusts are all but essential in some states, like California or Florida, the reality in Pennsylvania is quite different.
This guide explains what a revocable trust is and why, under Pennsylvania law, it might not be the revolutionary solution you expect.
1. What is a Revocable Trust?
A revocable trust is a legal arrangement that allows you to transfer ownership of your assets into a trust while you are still alive.
It involves three key roles:
- The Grantor (Settlor): That’s you—the person who creates the trust.
- The Trustee: The person who manages the assets. Usually, you name yourself as the initial trustee so you can maintain control. You typically name a successor trustee to take over for you if you become incapacitated or die.
- The Beneficiary: The person who is entitled to the benefit of the assets. Usually, during your lifetime, that is you. After your death, the trust specifies the people who receive your assets.
2. Key Characteristics:
- Flexibility: Because it is “revocable,” you can change the terms, add or remove assets, or cancel the trust entirely at any time, provided you are mentally capable. You remain in control during your lifetime while you have capacity.
- The “Funding” Requirement: A trust only controls what it “owns.” To make it work, you must retitle your real estate, bank accounts, and investments into the name of the trust or name the trust as the beneficiary. The funding process requires additional time and expense.
- Succession: When you pass away, a “successor trustee” you’ve already chosen takes over and distributes the assets without needing a court’s permission.
3. Why Trust Administration and Probate Aren’t That Different in Pennsylvania
In many states, probate is a slow, expensive, and public court-supervised process. In those places, avoiding probate is a massive win. But in Pennsylvania, court supervision of the probate process is minimal, and estates are often settled informally rather than involving the court. Here, the “trust vs. probate” debate is much closer than you might think.
- Probate is Affordable in Pennsylvania: In states like California, probate fees are often a percentage of the estate’s value, which can cost tens of thousands of dollars. In Pennsylvania, probate fees are relatively low and based on a sliding scale. For example, the probate fee for a $1 million estate in Allegheny County is about $1,400. Often, the legal fees to set up and fund a trust (which requires drafting deeds and retitling every account) are higher than the fees your family would pay to simply probate a Will after you pass.
- No Savings for PA Inheritance Tax: A common misconception is that revocable trusts save on taxes. In Pennsylvania, this is false. Whether your assets pass through a Will (probate) or a revocable trust, they are subject to the same Pennsylvania Inheritance Tax. Assets in a revocable trust are still considered “yours” because you had control over them. Therefore, the tax rates—4.5% for children, 12% for siblings, and 15% for others—apply regardless of how the assets are transferred.
- You Still Have Paperwork: Although a fully funded revocable trust avoids probate, your heirs aren’t finished the day you pass away. There is still a trust administration. Under Pennsylvania’s version of the Uniform Trust Act, which was passed in 2006, the rules for trust administration are similar to those that govern probate.
- No “Speed” Advantage: The most time-consuming part of any Pennsylvania probate or trust administration is preparing, filing, and waiting for Department of Revenue approval of the Inheritance Tax Return (REV-1500). This process is no faster for a trust administration than for probate.
- No Asset Protection: Many people believe a trust shields money from creditors or nursing home costs (Medicaid). A revocable trust offers no creditor protection. Because you can take the money back at any time, Pennsylvania law says your creditors can too. To protect assets, you would need an Irrevocable Trust, which requires giving up control of your money.
4. When SHOULD You Use a Revocable Trust in Pennsylvania?
While a trust isn’t a “magic bullet,” it is still the right tool for specific situations:
- Out-of-State Property: If you own a beach house or cabin in another state, a trust can help you avoid a second probate process in that state.
- Privacy: Wills become public record once filed; trusts generally do not.
- Incapacity Planning: A trust (coupled with a General Durable Power of Attorney) makes it easy for a successor to step in and pay your bills if you become ill or develop dementia.
- Continuing Trusts for Beneficiaries: Sometimes, it is necessary or preferable for beneficiaries to receive their inheritance in a continuing trust rather than outright. For example, minor or young adult beneficiaries, as well as those with special needs, creditor problems, addictions, or other vulnerabilities, may benefit from the protection afforded by a trust. Spouses with blended families may wish to protect children from prior relationships by creating spousal trusts. These inheritance trusts can be created in wills, but the privacy afforded by revocable trusts often makes them a more attractive option for this type of planning.
5. Bottom Line
There is no one-size-fits-all approach to estate planning. Whether a revocable trust is right for you depends on your specific situation and should be discussed with an experienced estate planning attorney.
For further information on this topic, please reach out to Claire Johnson Saénz at csaenz@smgglaw.com.
