Revocable Living Trusts

In many states over the last decade or so, the use of Revocable Living Trusts (generally referred to simply as “Living Trusts”) has increased as an alternative to the traditional Will for laying out someone’s desires for the division and distribution of their estate at the time of death. Although these trusts are not used as widely in Texas, they remain a viable estate planning option in certain situations.

The Living Trust is created during the lifetime of either an individual or a married couple, and the person(s) creating the Trust is known as the Grantor(s). At the time of the death of either one or both of the Grantors, the assets held in the Trust are distributed according to the provisions of the Trust agreement, rather than the provisions of a Will. As a result, if all of the Grantors’ assets are held in the Trust, then they can completely avoid the probate process.

Upon creation of the Trust, and continuing through the lives of the Grantors, all of the assets owned by the Grantors are transferred into the Trust. This includes real estate, as well as all personal property assets, such as bank accounts, insurance policies, stocks, brokerage accounts, etc. To accomplish the transfer into the Trust, new deeds must be prepared for real estate, new car titles must be issued, bank accounts must be re-styled to reflect the ownership by the Trust, and stock/brokerage accounts must be retitled in the name of the Trust.

Any assets not held in the Trust at the time of the death of either of the Grantors will be included in the probate estate of the Grantors and will be subject either to the provisions of their Wills or to the provisions of Texas law if they did not have Wills.

Benefits

In many states, the probate process can be very costly and time-consuming. By using the Living Trust, the Grantors can avoid the probate process completely. In those states, the biggest advantage to creating the Living Trust is the ability to avoid probate. Additionally, anyone owning real estate in more than one state is going to be required to have their estate probated in every state in which that person owned real estate. However, by transferring title to all of the real estate into the Trust, the probate process can be avoided in all of the states in which such property is located. Obviously, this avoids significant costs associated with hiring lawyers in multiple states.

Disadvantages

While the Living Trust can be advantageous, it is often difficult and expensive to fund the Trust initially and then maintain the Trust thereafter. For instance, the process of re-titling assets when the Trust is created can be expensive and time-consuming. To make the Trust fully effective, each and every asset owned by the Grantors will need to be transferred into the Trust so that all of their assets are held in the Trust.

Once the Trust is fully funded, the Grantors must remain vigilant for the remainder of their lifetimes that they reflect the Trust ownership every time they buy a new asset or open a new account. Any assets that are not held in the name of the Trust will fall into the probate estate and will be subject to the probate process upon the death of either of the Grantors.

Because most people in Texas are not accustomed to the idea of owning all of their assets in a Trust and operating all of their bank accounts in the name of a Trust, it is sometimes very difficult to successfully fund the Trust with each and every asset owned by the Grantors at the time of their deaths. As a result, those assets not held in the Trust are subject to the probate process. Inasmuch as avoiding probate is generally the biggest reason for creating such a Trust, the purpose is usually frustrated when probate is necessary to address the issues not held in the Trust.

Considerations in Texas

Because Texas offers independent probate administration, the probate process in Texas is generally very easy and uncomplicated if the Grantors have well-drafted Wills. As a result, the need to avoid probate in Texas is not quite as great as in many other states in the U.S. This consideration coupled with the difficulty in properly maintaining the Trust during the lifetimes of the Grantors makes the Living Trust a fairly ineffective method of avoiding probate.

Best use in Texas

Although very limited instances exist in Texas when a Living Trust provides a substantial benefit to the Grantors, one such instance exists where real estate is owned in multiple states. In that circumstance, the use of a Living Trust provides a very effective mechanism of avoiding the cost and complexity of probate in the multiple states in which real estate is owned.

For instance, one client of Ford & Mathiason owned two homes in California which he and his wife had purchased in approximately 1953. The couple thereafter moved to Texas where they had lived and owned a home since 1960. We transferred all of the real estate in California into a Living Trust, and after both Husband and Wife passed away, their children were able to sell the California homes within a few weeks and distribute the proceeds from the homes without ever having to bother with the probate process in California. Because the Grantors disliked the idea of holding all of their personal property in the Trust, we left their Texas home and their personal belongings out of the Trust and assisted them in preparing well-drafted Wills.

In situations like this one, the use of the Living Trust provided a substantial benefit to the Grantors and their family. We completed avoided probate in California, and they completed the probate process in Texas easily and quickly because of the simplified process in Texas.

Common Myths about Living Trusts

Many people have the mistaken impression that a Living Trust will save them from paying taxes at death. Unfortunately, this is a complete myth.

All of the assets that someone owns in a Living Trust are included in their estates for tax purposes at death. Although a Living Trust can incorporate tax saving options like the Bypass Trust, all of the advantages that can be incorporated into a Living Trust can also be utilized under a well-drafted Will. Although some lawyers in Texas attempt to convince clients that the Living Will provides huge tax advantages, they actually do not. Therefore, tax issues should not drive the decision of whether or not to create a Living Trust.

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