A living trust is a legal document that allows an individual (called the “grantor” or “settlor”) to transfer ownership of their assets to a trust while they are still alive. The trust is managed by a trustee (which can be the grantor themselves or someone else) for the benefit of the trust’s beneficiaries (which may be the same person as the grantor if a successor beneficiary is identified upon the death of the successor trustee orthe grantor-beneficiary).
One of the main advantages of a living trust is that it can be used to avoid estate or inheritance taxes because the assets belong to the trust, not the decedent’s estate, thus the trust assets can avoid taxation.
However, currently the federal estate tax threshold has been raised to the point that many people in Texas have no concern that their estate qualifies for the federal estate tax. Their estate simply is not large enough to incur the tax, meaning this may not be the best estate planning tool.
Still, there are a significant number of people, attorneys included, who often say that “everyone” needs a trust to allow an estate plan andfor the smooth transfer of assets upon the grantor’s death without the need for probate, which can be a long and costly process. The avoidance of probate is by far the most often cited reason that people want to make a living trust.
However, it is a little-known fact that there are many people in Texas for whom a simple Will makes more sense, even though a Will must go through probate to take effect. Further, many people are shocked to find out that the living trust does not guarantee that the family won’t have to go to probate court.
It is important to consult with a Texas living trust attorney who drafts both living trusts and simple wills to determine whether or not a living trust is the best route to use for your particular situation. Make sure that the person you consult on this subject takes the time to find out the type and size of property left in your estate, where your property is located, and why you think a living trust is right for you.
Watch out if they try to convince you to create a living trust before they know anything about the size and location other significant assets of your estate.
There are also some potential downsides or pitfalls to consider before setting up a living trust that you may never hear about. Here are a few:
- Upfront and ongoing costs: Setting up a living trust can be expensive, as it typically requires the help of an attorney. Not only is there the cost of drafting the trust document, but also if real estate is going into the trust, new deeds must be prepared and notarized. There are filing fees to record the deeds. Once the deeds are recorded, you may find it more difficult to qualify for property tax exemptions on that property or to get a home equity loan because now you don’t own the property – the trust owns it. There are also ongoing costs for maintaining the trust, such as the trustee’s fees and any expenses related to managing the trust’s assets. It is not unusual in Texas for the cost of creating, funding and maintaining a living trust to exceed the cost of a simple Will and the entire probate process combined. Texas probate is not necessarily time consuming nor expensive for someone who has a properly-prepared Will. It is those people who have to navigate the probate courts without a Will that find probate frustrating and expensive. People hear of extreme cases of costly probate proceedings and do not realize that the average cost of probate is much less than the average cost of creating a living trust in Texas.
- Many estates with Living Trusts Don’t Avoid Probate Anyway: You hardly ever hear about this, but it is a dirty little secret that not everyone with a living trust is able to avoid probate. Unfortunately some people create a trust document but never transfer their assets owned into the trust name, perhaps because no one ever explained to them that it was necessary. For a living trust, Texas in particular, must be must be funded to be effective, and the trust has no control over assets that are never placed under the trust ownership. Any property that is outside the trust at the time the grantor dies must then go through probate. That is why whenever a trust is created, it is recommended that a Will be signed at the same time. Why would you need a Will if you are going to avoid probate? The answer is because there is no guarantee that you will completely avoid probate even though you have a living trust.
- Complexity: A living trust can be a complex legal document, and it is important to make sure that it is properly drafted and funded in order for it to be effective. This requires a thorough understanding of the legal process and the trust’s terms, which may not be accessible to everyone. When faced with a 35-page document full of terms that are unfamiliar, do you have the patience and time to figure out what all the duties of the trustee may be? If you are a grantor who is also the trustee and beneficiary of the trust, as is often the case, then you need to understand how to set up and maintain the trust and you need to understand the rules or you may invalidate the trust, or worse, you might get sued by successor beneficiaries, because you didn’t understand it. Often people have a concept that the trust is going to be managed by some big bank’s trust department, but unless the estate is very large, it is probably not set up that way. You may be on your own trying to understand the terms of the trust. Keep in mind too that not all trusts are alike. A trust is an agreement and your trust agreement may not be the same as your neighbor’s trust.
- Limited control: When you transfer ownership of your assets to a trust, you are giving up a certain degree of control over them. The trustee is responsible for managing the trust’s assets and making decisions on behalf of the beneficiaries, and the grantor may not have the ability to make changes to the trust or access the assets while they are alive.
- Potential for disputes: There is a risk of disputes or disagreements arising within the trust, particularly if there are multiple beneficiaries with conflicting interests. People may disagree on what the trust terms mean. Trustees may also be sued if they breach their fiduciary duty or make decisions that are not in the best interests of the beneficiaries. There is a duty to use the utmost care to protect the trust property from loss, and a risky investment can mean that the trustee is personally responsible for the loss. People are sometimes told that as the trust beneficiary and trustee they can use the property however they wish, but there are always other future beneficiaries who may file suit if they think the trustee mismanaged the trust.
- Limited flexibility: A living trust is a legally binding document, and making changes to it can be difficult or impossible once it has been established. This can be problematic if the grantor’s circumstances or wishes change over time. Even if it is possible to make changes, it generally involves paying a lawyer to make those changes.
- State laws: Living trusts are governed by state law, and the specific rules and regulations can vary from one state to another and the laws can change over time. This can make it difficult to know what to expect and how to properly set up and maintain a trust if you are not familiar with the current laws in your state.
- Limited asset protection: While a living trust can provide some asset protection, it is generally not as effective as other options such as a limited liability company (LLC) or a corporation. These entities can provide stronger protection against creditors and lawsuits, but they also come with their own set of drawbacks and complexities.
Why do so many people, even estate planning attorneys attorneys, claim that “everyone needs a trust”? There are a number of reasons. Outside of Texas, it may be true that (nearly) everyone needs a trust in some states, due to that particular state’s laws. Some states have federal estate taxes ora much lower threshold for a state inheritance tax and some states have a much more cumbersome probate process than Texas.
Texas is a friendly state for both an estate planning attorney andproperty ownership and probate. However, if you own real estate or investment property in other states, even though you reside in Texas, you may want a trust because Texas has no control over property in other states.
Why is it that you never hear of the downside to living trust in Texas? One reason is simply ignorance, of course. People read over-simplified explanations written by people outside of Texas and assume that everything they read is true.
Another reason is greed. There are people who make more money preparing living trusts because the cost of a trust is often ten times more expensive than the cost of a simple will. Whenever someone thinks that a living trust is a good idea and they go to meet with someone who wants to sell them a living trust, there is generally not enough explanation given.
Before they realize what has happened, the client walks out with a notebook full of legal documents and financial accounts that they don’t understand, which they put in a drawer and never look at again, assuming that everything is taken care of properly. Only after they have passed away, do their loved ones find that the trust was never set up properly nor never funded.
It is a good idea to make sure that the person with whom you are consulting about creating a trust does not deal exclusively in living trusts.
There is an old saying “to a hammer, everything looks like a nail.” To someone who does only living trusts, they may sell you a living trust without ever even considering that there might be a more suitable solution for you.
Sure, a living trust can be used to transfer your assets at death, but it may be like using a shotgun to kill a fly. Sometimes, you are really better off with a flyswatter.
In conclusion, a living trust can be a useful tool for transferring assets and avoiding probate, a living trust can be used to keep personal property and avoid estate taxes, and there are some legitimate reasons that a trust is the best choice for many people, but it is important to carefully consider the potential downsides and pitfalls before setting one up.
It may not be the right choice for everyone, and it is always a good idea to consult with a Texas estate planning Attorney and other financial professionals before making any decisions. The living trust in Texas might not live up to all the promises that you have heard about them.