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A living trust is a legal estate plan that lets an individual, or grantor, transfer property ownership to beneficiaries. The trust goes into effect as soon as the grantor creates it, and the grantor may be able to modify or revoke any of the trust’s provisions. However, this depends on the type of living trust you choose.

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The two types of living trusts are irrevocable living trusts and revocable living trust. Irrevocable living trusts cannot be altered or terminated without the permission of all of the trust’s beneficiaries. Grantors can alter or terminate any provisions they make in revocable living trusts.  If you do not want people to argue and dispute about the terms written in the trust, you want to create an irrevocable living trust.

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Setting up a trust could vary by State. Below, is how you can form a living trust in Pennsylvania:

1. Select the trust that best fits your financial situation: There are individual trusts and joint trusts. It’s best to use an individual trust if you’re single. If you’re married, you should probably use a joint trust. Married couples can also use two individual trusts.

2. Take stock of your property: Determine which property and assets you want to include in the trust. You can store things like bank accounts, real estate, stocks and bonds, retirement accounts and documents of ownership in your trust.

3. Select a trustee to manage your living trust: You can act as the trustee, or you can appoint someone else to manage the trust. If you want to act as the trustee, you will need to choose a successor trustee to manage your assets after your incapacitation or death.

4. Create the trust document: You’ll have a few options for doing this. If you’d rather create the document on your own, you can use an online program. Alternatively, you could hire a financial advisor or lawyer to help you with the process.

5. Get your trust document notarized: Sign the trust while a notary public is present.

6. Fund the trust by transferring property into it: This ensures your trustee can successfully distribute your property to your beneficiaries. A lawyer can assist you with this process as well.

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Even if you have a Trust, you will still need a Will. This might seem confusing, however, and your Will might never be used. But you should still write out a Will, for one or both of the following reasons:

• Designating a guardian for minor children. You can't use a trust to name a guardian for your minor children. For this reason alone, if you have minor children, you should write a Will that names the guardian.

• Accounting for property that you haven't transferred to your trust.  People create a trust and forget to formally transfer property to the trust (for example, they never get around to changing the deed on their house). Or, people buy or inherit property after they've set up their trust, and forget or don't know to take ownership as the trustee of their trust. Either way, the property won't be distributed according to the terms of the trust. You should have a Will as a backup to dictate how to distribute assets that aren't in the trust

If you don't have a Will, any property that isn't transferred by your living trust or other method (such as joint tenancy) will go to your closest relatives as determined by PA state law.   

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A Living Trust usually does not reduce estate tax in Pennsylvania  However, most people don't need to worry about federal estate taxes, because the federal estate tax is levied only on estates worth more than $13.61 million (for deaths in 2024). Pennsylvania doesn't impose its own state estate tax (but please note that it does have a state inheritance tax).

If you have an estate worth more than $13.61 million—or you and your spouse have a combined estate of close to $27.22 million, you might be able to use a more complicated trust (such as an AB trust) to reduce or avoid federal estate taxes.

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An AB trust, also known as a bypass trust or credit shelter trust, is an estate planning tool that married couples in Pennsylvania can use to reduce or eliminate federal estate taxes. It's typically used when a couple's estate is larger than the amount exempt from federal estate tax. 

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An AB trust works by splitting a joint trust into two parts after the death of the first spouse: 

• Trust A

  Also known as the marital trust, marital deduction trust, or QTIP trust, this part holds the amount that the deceased spouse's exemption can't shelter from tax. 

• Trust B

  Also known as the decedent's trust, family trust, or bypass trust, this part holds the amount that the deceased spouse's exemption can shelter. 

The split defers estate taxes until after the surviving spouse dies, and the surviving spouse has limited control over Trust B. However, the terms of the trust can be set to allow the surviving spouse to access and even draw income from the assets in Trust B. 

In addition to minimizing estate taxes, an AB trust can help loved ones avoid probate court. 

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Before opening a Trust it is important that you consult with a professional who can provide you with legal advice that knows applicable laws for the state in which you reside.

 

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By Jason Torrents