The Living Trust Fallacy in Texas
I constantly receive calls from existing and potential clients about “living trusts” and how they have heard someone talking about how much they need one. My response to most of these people is to ask them a simple question: Why do YOU need one? It is almost inevitable that I get the same answer—“to avoid probate.” When I hear that, I almost have to cringe, because the reality is that in Texas, there is not the need to avoid probate.
Texas has an administration process that is probably the simplest in the nation. It is known as "independent administration", and it means that other than proving the Will is valid, the appointment of an executor, and the filing with the probate court of an inventory of the assets that actually pass under the Will, there is no court involvement in the administration of the estate. The executor handles all matters independent of court supervision, and needs no approval from the Court to sell property, distribute assets, pay expenses, or do anything else that might arise in the regular administration of an estate. This saves time and money, since there is no necessity to go to the Court (incurring legal expenses) for approval of anything the executor needs to get done. Therefore, in Texas, delays or prohibitive costs of probate are not as much of a concern as they are in many states, the way they might be in California, New York or Florida.
Here are some other fallacies about living trusts in Texas:
1. The Estate Tax Savings Fallacy. One of the “big lies” that I often hear about revocable living trusts is that it will help the Grantor (i.e., the person creating the trust) save on taxes. How does it do that? The living trust contains a “bypass trust” to hold the Grantor’s exemption against estate tax upon the Grantor’s death for the benefit of the Grantor’s surviving spouse. This “bypass trust” is the same type of trust that is utilized in Wills all the time. In other words, it is not saving any additional taxes that you would not have saved by using the same type of trust in the Last Will and Testament. Further, if the Grantor is not married, a living trust cannot save anything from an estate tax standpoint. Every asset held by the living trust will be subject to inclusion in the estate of the Grantor, so there is no “tax savings” by transferring assets to a revocable trust by a single person.
2. The Creditor Protection Fallacy. It also cannot protect you from creditor claims (another fallacy that trust salespeople trumpet). Transferring the assets to a revocable trust (at least in Texas) means that the Grantor still has the power to get to the assets at any time. Even if there is an independent trustee, the fact that the trust is revocable means that the Grantor can terminate the trust and have the assets returned at any time. Texas law provides if the Grantor has full access to trust assets, then creditors have that same access.
3. The Cost Savings Fallacy. Because living trusts can (in some cases) be more complicated than wills, they typically cost more. There is also the necessity to transfer title to property (which requires deeds and other title transfer documents), which, if the attorney prepares, adds to the costs. Many times property does not wind up getting transferred to the trust, and you have to probate the Decedent’s Will anyway. If the Decedent had a pour-over will -- a will that says that everything owned by the Decedent flows into the living trust, the administration of the estate would be fairly straightforward and possibly reduce the probate costs. However, I have found that I can typically prepare the Will, and then probate and administer an estate where there is no living trust for the same or less cost than to prepare the trust and transfer all the assets to the trust. To me, the cost savings issue is not that great. However, I am speaking as a Texas attorney, and this likely would not hold true in California or New York.
The only times when I have found utilizing a living trust is a good idea is under the following circumstances:
Real estate in another state -- If you are a Texas resident and own real estate in another state, utilizing a living trust would eliminate the necessity of having to go through a probate proceeding in that state.
Incapacity issues – If you are concerned about incapacity (e.g., you have a history of Alzheimer’s Disease in your family), perhaps a living trust could be utilized to provide for the management of your assets in the event of your incapacity, especially if you have no close friends or family members who would act on your behalf. In that case you might need a professional trustee to manage your assets for you. On the other hand, of you have family members that you trust to manage your assets, a simpler method of the continuing management of the assets would not be a living trust, but general power of attorney naming an agent to handle financial matters for you in the event of your incapacity.
Will contest likely -- If your loved ones are likely to fight over your will, then in some cases (with expert advice and attention) a living trust may make it less likely that someone will successfully contest your plan based on undue influence, lack of capacity, etc.
Many (if not all) of the above situations may not be relevant to you. Thus, a living trust likely is not a viable estate planning alternative if you are a Texas resident. Utilizing a Will, a general power of attorney, a medical power of attorney and a directive to physicians is still likely to be the most estate planning you will ever need. However, as always, you should consult with a competent attorney who practices in the estate planning area to help you make that determination.
Texas has an administration process that is probably the simplest in the nation. It is known as "independent administration", and it means that other than proving the Will is valid, the appointment of an executor, and the filing with the probate court of an inventory of the assets that actually pass under the Will, there is no court involvement in the administration of the estate. The executor handles all matters independent of court supervision, and needs no approval from the Court to sell property, distribute assets, pay expenses, or do anything else that might arise in the regular administration of an estate. This saves time and money, since there is no necessity to go to the Court (incurring legal expenses) for approval of anything the executor needs to get done. Therefore, in Texas, delays or prohibitive costs of probate are not as much of a concern as they are in many states, the way they might be in California, New York or Florida.
Here are some other fallacies about living trusts in Texas:
1. The Estate Tax Savings Fallacy. One of the “big lies” that I often hear about revocable living trusts is that it will help the Grantor (i.e., the person creating the trust) save on taxes. How does it do that? The living trust contains a “bypass trust” to hold the Grantor’s exemption against estate tax upon the Grantor’s death for the benefit of the Grantor’s surviving spouse. This “bypass trust” is the same type of trust that is utilized in Wills all the time. In other words, it is not saving any additional taxes that you would not have saved by using the same type of trust in the Last Will and Testament. Further, if the Grantor is not married, a living trust cannot save anything from an estate tax standpoint. Every asset held by the living trust will be subject to inclusion in the estate of the Grantor, so there is no “tax savings” by transferring assets to a revocable trust by a single person.
2. The Creditor Protection Fallacy. It also cannot protect you from creditor claims (another fallacy that trust salespeople trumpet). Transferring the assets to a revocable trust (at least in Texas) means that the Grantor still has the power to get to the assets at any time. Even if there is an independent trustee, the fact that the trust is revocable means that the Grantor can terminate the trust and have the assets returned at any time. Texas law provides if the Grantor has full access to trust assets, then creditors have that same access.
3. The Cost Savings Fallacy. Because living trusts can (in some cases) be more complicated than wills, they typically cost more. There is also the necessity to transfer title to property (which requires deeds and other title transfer documents), which, if the attorney prepares, adds to the costs. Many times property does not wind up getting transferred to the trust, and you have to probate the Decedent’s Will anyway. If the Decedent had a pour-over will -- a will that says that everything owned by the Decedent flows into the living trust, the administration of the estate would be fairly straightforward and possibly reduce the probate costs. However, I have found that I can typically prepare the Will, and then probate and administer an estate where there is no living trust for the same or less cost than to prepare the trust and transfer all the assets to the trust. To me, the cost savings issue is not that great. However, I am speaking as a Texas attorney, and this likely would not hold true in California or New York.
The only times when I have found utilizing a living trust is a good idea is under the following circumstances:
Real estate in another state -- If you are a Texas resident and own real estate in another state, utilizing a living trust would eliminate the necessity of having to go through a probate proceeding in that state.
Incapacity issues – If you are concerned about incapacity (e.g., you have a history of Alzheimer’s Disease in your family), perhaps a living trust could be utilized to provide for the management of your assets in the event of your incapacity, especially if you have no close friends or family members who would act on your behalf. In that case you might need a professional trustee to manage your assets for you. On the other hand, of you have family members that you trust to manage your assets, a simpler method of the continuing management of the assets would not be a living trust, but general power of attorney naming an agent to handle financial matters for you in the event of your incapacity.
Will contest likely -- If your loved ones are likely to fight over your will, then in some cases (with expert advice and attention) a living trust may make it less likely that someone will successfully contest your plan based on undue influence, lack of capacity, etc.
Many (if not all) of the above situations may not be relevant to you. Thus, a living trust likely is not a viable estate planning alternative if you are a Texas resident. Utilizing a Will, a general power of attorney, a medical power of attorney and a directive to physicians is still likely to be the most estate planning you will ever need. However, as always, you should consult with a competent attorney who practices in the estate planning area to help you make that determination.
posted by Gary Howell at 10:16 AM
