Think Twice Before Choosing a Revocable Living Will

At present, many individuals, and some senior citizen organizations, are pushing to have a “Revocable Living Trust” to be used as the main document for estate and elder planning purposes. The Revocable Living Trust (known as an “RLT” in estate planning lingo) is a useful estate-planning document because you can designate assets to be placed in trust and then avoid probate. But read on and you'll hear why RLTs are not a cure-all.

First, probate is only a problem in a handful of states and Pennsylvania is not one of them. So the RLT is not as useful to Pennsylvania residents as it is in other states.

Generally, the maker of an RLT appoints himself as the trustee and another person as the back up or alternate trustee in case he should become disabled or die. Few people realize that while these documents are sold on the idea of being revocable (i.e., they can be changed), once the maker becomes disabled, the trust becomes irrevocable (unchangeable). So you can only change RLTs while you are healthy. Thanks to modern medicine, persons often live for a very long time while disabled mentally, such as with Alzheimer's disease. Often people have not given enough thought to who they want to handle their affairs and how they want their finances managed before they become disabled and these decisions become cast in concrete once disability starts.

There are a number of other drawbacks t RLTs also. Since he RLT only deals with designated assets, the maker must carefully re-title all assets he or she intends to protect with it. At a minimum, a list of assets that are to be covered by the RLT should be prepared and attached to the trust document as a designated exhibit. This can be more work than it seems. If, for instance, a bank account is put into the trust and then the bank is taken over through a bank merger, you need to update your trust document to include the “new” asset. While re-titling an asset or up dating a trust exhibit for the trust is easy, many people neglect to pay adequate attention to detail work and this can cause major headaches to their heirs. Few people are detail oriented enough to make sure each asset they own is, and continues to be, properly titled.

Your Will would have to deal with any property that is not titled in the name of the trust at the time of your death. The RLT can usually “own” only asset that have paper titles, such as bank accounts, real estate, mutual funds. Personal property, such as furniture, must usually be conveyed by Will. Therefore, you must have a Will even if you also have a signed RLT. Additionally, you never know how or when you may die. For instance, you may be killed in a car accident that is the fault of others. If so, your heirs could sue and recover on your behalf a huge amount of money that you had not foreseen, and thus, this recovery would not be provided for in your RLT. So even with an RLT, you will need a Will for any property that cannot be titled into your trust such as furniture and other personal possessions, and any asset you fail to title into your trust.

Additionally, RLTs never save you Federal Estate or Pennsylvania Inheritance Taxes because they cannot take advantage of IRS and Pennsylvania regulations to avoid or minimize taxes. For many people there are other devices that will save them or their heirs taxes, but those focusing on “avoiding probate” at all costs by using an RLT, seem to rarely seek advice o n how to save on these taxes.

Another consideration for estate and elder planning is paying the cost of nursing homes. For many people under 65 the way to solve the problem of the costs of nursing home is long-term care insurance. But, for those who are too old or too ill, the usual approach is to have the people made financially eligible for a joint Federal/State program known as “Medicaid”. As many know, Medicaid looks closely at a person's assets and income and then “looks back” to see if any gifts were made in the past. Generally, the period of the “look back” is three (3) years for assets transferred for less than full market value. But, Medicaid regulations will look back for five (5) years to seek out any assets placed into any sort of trust. If the trust is irrevocable, Medicaid will generally consider the assets unavailable if the assets were shifted five or more years ago. But, for any sort of revocable trust, as all RLTs are, Medicaid will always consider the assets in a revocable trust available, regardless of how long ago the assets were transferred in or the trust was created. Thus and RLT has no value in planning for Medicaid.

Additionally, if you have minor children, your Will can appoint a guardian to physically raise them and a trustee to handle the money you leave them until the reach an age you feel comfortable with them inheriting your money. While the guardian and trustee may be the same people, they don't have to be and normally should not be, because then one person has your children and all of your money. You may have a relative or friend that gets along very well with your children and another relative or friend that you feel would be better at managing money.

Since and RLT becomes irrevocable on the maker's disability, the maker needs to look closely at what should happen if he or she becomes disabled. A durable power of attorney is not part of an RLT but should be part of any senior's long range planning tool kit. The Power of Attorney (POA) can either be effective now or take effect only when the maker's physician certifies him/her disabled. The POA can and should be specifically tailored to handle any financial transaction that may come up for that particular client. This usually includes the power to pay bills and engage in a variety of banking transactions and may include the power to buy or sell real estate.

There are more than twenty recognized powers that may be placed into a POA. If the make is still employed, the power should include (for each employer) the power to engage in retirement planning (i.e., deciding which pension option to take upon retirement). If the maker is wealthy and concerned with the Federal Estate Tax upon his death, the POA may delegate to the agent (formerly known as the “attorney-in-fact”), the power to make gifts as part of a strategy to lower or avoid this tax. Similarly, the POA may authorize the agent to engage in Medicaid planning.

Additionally, while the person is disabled, someone should be appointed to make all manner of health care related decisions. This health care power may be part of a standard, financial power of attorney. Legally, there is nothing wrong with this.

However, a good financial Power of Attorney can easily run six (6) or more pages. Health care professionals hate wadding through the “legal gobblygook” to find a few paragraphs dealing with medical/surgical care. Additionally, a copy should be a part of your medical chart at any institution from which you may receive services. Do you want every nurse on duty, every lab technician, etc. to have access to all of your financial instructions? Medical professionals greatly prefer a one-page document dealing solely with health care powers. This can be stapled into medical charts and can easily be read by those who need to know and keep private your financial matters.

Thus, while RLTs avoid probate, the probate process is nothing to be feared in Pennsylvania . RLTs do not save on Federal Estate or Pennsylvania Inheritance Taxes. You still need a Will for those assets that you cannot place into a trust, as well as those you may overlook. An experienced elder law attorney, as part of preparing a Will, can point you in the right direction to minimize or avoid these taxes. In addition, since an RLT becomes irrevocable upon disability, much thought should be given to what will happen while you are disabled. Every senior needs to give serious thought to preparing a durable financial Power of Attorney and a separate Health Care Power of Attorney. These documents are not part of a Revocable Living Trust.