Sandra Reed’s Life Care Planning: What is a living trust and why Texans most likely don’t need one

Attorney Sandra W. Reed answers your life planning questions.

Attorney Sandra W. Reed answers your life planning questions. Photo by Kathryn Jones/GR Current

By Sandra W. Reed

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,” he says.

Tommy has seen the ads in magazines and on TV. His financial planner even invited him to a seminar aimed at convincing him to purchase a living trust. What should Tommy do?

 Living Trust: What Is It?

A living trust is created when a person executes a document called a trust agreement. The document names the person creating the trust as both the trustee and the 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 the individual creates the trust, then he or she transfers all assets to the trust. The results of the living trust are twofold:  (1) the creator as primary beneficiary can make distributions from the trust any time he or she wishes; and (2) when the creator of the trust dies, no assets are subject to probate.

Fact or Fallacy: Everyone Should Have a Living Trust

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. Why?  Because probate in Texas can be a simplified procedure known as “independent administration” set up by a decedent’s will with the proper language to create it.

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 for free.

Fallacy: Living Trusts Reduce Taxes 

A living trust will not save taxes if you live 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, which has an exemption of only $625,000. So a living trust presents a potential advantage for them that a Texas resident would not receive because Texas does not have a state estate tax.

The living trust does not protect against federal estate taxes becausethe assets in the living trust are counted in the trust creator’s estate for federal estate tax purposes.

Fact or Fallacy: No Texan Should Ever Have a Living Trust

Fact: A Living Trust Can Provide For Management of Assets Upon Disability

The creator of a living trust can name a successor trustee to manage the 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: A Living Trust Can Avoid Probate Of  Real Estate Owned Outside Texas

If a person dies in Texas owning real estate out-of-state, his or her heirs will have to probate the property in the other state. This could be expensive. One way to handle this is to have a living trust that contains only the out-of-state property. This avoids the management disadvantages of a living trust while avoiding the out-of-state probate.

Fact: A Living Trust Is 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 if the trust is immediately challenged upon creation, the creator’s being alive can make defending his or her capacity easier.  Therefore, a living trust may be useful if one anticipates a family feud resulting in a  contested will.

Fact: A Living Trust Is More Private Than a Will

The original will in Texas is filed with the probate court. The executor of a will in Texas must file an inventory of assets and their approximate values. These filings become public records available to anyone who wishes to look at them. A living trust does not have that same requirement.

However, the living trust does not provide complete privacy because 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.

Fact or Fallacy: A Will Is Not Necessary With a Living Trust

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 for him 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 by email at swreed2@yahoo.com

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