Tommy Thumb lives in Texas. His sister married a Yankee and moved to New Jersey. Tommy’s brother-in-law is ragging on him to set up a living trust - “Man, do it. You save all kinds of money on probate and taxes.”
Tommy has seen the advertisements. His financial planner even invited him to a seminar aimed at persuading him to purchase a living trust. What should Tommy do?
What It Is?
A living trust is created when a person executes a document called a trust agreement, naming the person creating the trust as both the trustee and primary beneficiary. The trust agreement must also name a successor trustee to take over the responsibilities of administering the trust after the creator dies.
Once an individual creates it, they transfer all assets to the trust. The results of the living trust are twofold - the creator, as primary beneficiary, can make distributions from the trust at any time and when the creator dies, no assets are subject to probate.
Fallacy: A living trust does not save probate costs in Texas
The claim that everyone needs a living trust is a fallacy in Texas. There are some valid reasons to have a living trust, but there is absolutely no need to create one to avoid probate in Texas, because the process can be a simplified procedure known as “independent administration” set up by a decedent’s will.
Although many states impose costly procedural requirements that can take years to complete, a Texas independent administration can be completed within three months if no estate tax return is required. The fees charged to set up a living trust may exceed those charged for handling an independent administration in which no issues are contested.
A living trust will not avoid an executor’s fee in most circumstances. A person who can’t find a volunteer willing to administer the estate for free is not likely to secure someone to administer the living trust without cost.
Fallacy: Living trusts reduce taxes
A living trust will not save taxes in Texas. A living trust will not affect income taxes at all - no matter where you live. Tommy’s sister and brother-in-law face a New Jersey estate tax with an exemption of only $625,000, so a living trust presents a potential advantage for them. A Texas resident would not receive the exemption because the state does not have an estate tax. The living trust does not protect against federal estate taxes because the assets in the living trust are counted in the creator’s estate for federal estate tax purposes.
Fact: They can provide management of assets upon disability
The creator can name a successor trustee to manage the living trust in the event of mental disability that prevents management of one’s own affairs. Although the trust functions like a power of attorney, banks and title companies are more willing to accept a trust and act on it.
Fact: Living trusts can prevent probate of property outside of Texas
If a person dies in Texas owning real estate outside of the state, their heirs will be required to probate the property in the other state. This could be expensive. But, having a living trust that contains only the out-of-state property is an option that avoids management disadvantages of a living trust and out-of-state probate.
Fact: They are typically harder to challenge than a will
As a practical matter, a living trust is typically harder to challenge than a will when the creator has effectively managed it for a number of years prior to death. Even when a trust is immediately challenged, the creator’s being alive can make defending their capacity easier. A living trust may be useful if a family feud could result in a contested will.
Fact: Living trusts are more private
The original will in Texas is filed with the probate court. The executor must file an inventory of assets and their approximate values, which become public records. A living trust does not have that same requirement.
However, living trusts do not provide complete privacy since many assets are already a matter of public record. For instance, the deed to real estate owned is filed with county records along with the amount of original mortgages. Ad valorem tax records on real estate are available to the public. Marriage licenses, birth certificates and other records which contain personal information are public records.
Fallacy: Most people need a will, even with a living trust
A living trust will not necessarily do away with the need for a will. It is difficult to be certain all assets have been transferred into the trust. A will is still needed to properly transfer assets outside the trust, unless they are passing through non-probate means, such as beneficiary designations, pay-on-death provisions or right of survivorship.
What should Tommy do?
In all likelihood, Tommy does not need a living trust. Like most people, any advantages are outweighed by the disadvantages. This is especially true for Tommy, who is disorganized and hates dealing with detailed paperwork.
A living trust is not that complicated to manage, but it does require a certain amount of record-keeping.
Sandra W. Reed is an attorney practicing in Glen Rose. She is Of Counsel with the Elder Law firm of Katten & Benson in Fort Worth. If you have any questions, you may contact her by phone at (254) 797-0211 or firstname.lastname@example.org .