Do I need a living trust?You may have seen an advertisement in the newspaper, or perhaps you attended a financial planning seminar that described revocable inter vivos trusts, also known as living trusts. A living trust works like this: You execute a document, called a trust agreement, that creates the trust. The trust agreement names you as the trustee and the primary beneficiary of the trust. As beneficiary, you are entitled to distributions of trust assets whenever you want them. You then transfer your assets to the trust, so that when you die, you own nothing that is subject to the probate process.
Some planners assert that everyone should have a living trust, while others believe that a will is all most people need. Before you make a decision to incur the extra cost and hassle of a living trust, you should know two things:
1. In Texas, probate can be fast and inexpensive.Some states impose procedural requirements that generate large legal fees and take years to complete. But Texas has a vastly simplified procedure called "independent administration" that you can take advantage of merely by using the proper language in your will. An independent administration can often be completed within three months if no estate tax return needs to be filed. My fee to set up a living trust usually comes to about the same amount as my fee to handle an uncontested probate with independent administration. So a living trust in Texas is not likely to save probate costs. It won't even save you the cost of the executor's fee; if you don't have a relative or friend who is available to serve as executor for free, then you probably won't be able to find anyone to serve as successor trustee of a living trust for free, either.
2. Living trusts do not save taxes. Anyone who tells you that a living trust will save estate or income taxes is mistaken. A living trust can do nothing about income taxes. And while it is true that a living trust may contain the same estate tax-saving provisions as a will, and therefore is better than nothing, the decision to execute a living trust instead of a tax-planned will is going to have no effect on your estate tax bill. (This assumes you live in Texas. If you live in another state, ask an attorney to explain your state's death tax. Most -- but not all -- states follow the same system as Texas.)
For more information on the myths about living trusts, you may wish to read the online brochure published by the State Bar of Texas. Or scroll down to learn about the legitimate uses of a living trust.
So who should have a living trust? I have developed some general guidelines to help you decide whether a living trust is right for you. In general, you should consider a living trust if:
1. In addition to any other reason below, you are a well-organized, prompt record-keeper.A living trust must be properly maintained for the rest of your life. It is not a highly technical or difficult process, but it involves detail work that some people are not in the habit of doing. You must always remember that you have a living trust and that all of your assets should be owned by the Trust, rather than by you personally. If you purchase property, you must purchase it in the name of the Trust. If you inherit property, you must transfer it to the Trust immediately. When you open a bank account, you must explain the trust to the bank and make sure the trust is the official owner of the account. Why all this hassle? Because the benefits of a living trust (such as disability planning or probate avoidance) apply only to the assets in the trust. For example, if just one bank account is in your name alone instead of in the trust, then your estate will have to go through probate and incur all the costs of probate, on top of what you have paid to have a living trust.
2. You want to give someone full authority to manage your assets if you become mentally disabled.A living trust can appoint a successor trustee to take over if you become unable to manage your affairs. It functions much like a power of attorney, but banks and title companies are much more willing to accept a trust and act on it. Some banks are irrationally stubborn about powers of attorney - they just don't want to deal with them. But they usually will deal with living trust documents.
3. You own real estate outside of Texas.The Texas probate process can be very simple if your will is drafted properly. For most Texans, the cost of probate winds up being about equal to that of a living trust, especially when you consider the fact that a living trust must be paid for now, but probate doesn't have to be paid for until after you die. In some other states, however, probate is a long, expensive process. If a Texan owns property in another state, his heirs will have to probate the property in that state. Many Texas estate planners will set up a living trust just for out-of-state property. This avoids much of the hassle of a living trust, yet also avoids out-of-state probate.
4. Your will is likely to be challenged.In practice, it is more difficult to challenge a living trust than to contest a will, particularly if the living trust was properly operated by the testator for many years before he or she died. Of course, a living trust can be challenged as soon as it is set up, but since you are still alive you can testify on your own behalf. (The reason why many will contests succeed is because the deceased is not available to defend himself.) For this reason, living trusts are frequently used to avoid fights in nontraditional family settings -- stepfamilies, unmarried companions, etc. If you are concerned about your will being contested, a living trust is a good idea, even if you have to pay a professional trustee to maintain it for you.
5. You want to keep your estate completely private. Even under Texas' simplified probate process, your executor may have to file an inventory of your assets and their approximate values, and this filing, along with your will, is a public record that anyone can look at. A living trust does not have to do this. However, you should keep in mind that many of your assets are already a matter of public record. The deed to your house is filed with your county, and so is the initial amount of your mortgage. Your marriage license, birth certificate, and other records contain information about your age, marital status, etc. The title information for a car is available to many businesses and governmental agencies, and also to direct mail marketers if you have not filed an opt-out form with the Texas Department of Transportation. Incorporation records, limited partnership filings, and assumed name filings are also public records, so your ownership of a business may also be discovered. Finally, consider your credit report, which technically isn't a public record, but is still available to many people (with few safeguards) and which contains a great deal of information about your assets purchased on credit, employment history, marital status, etc. For many people, probate doesn't reveal any information to the world that a good detective or scam artist can't already figure out.
Furthermore, if your estate has no unsecured debts, it may not even have to file an inventory as part of probate. Of course, the will must still be filed, so anyone will be able to discover who is inheriting your property, but they will not be able to find out what or how much your beneficiaries are getting.
Nevertheless, some people find that the relative privacy of a living trust is still valuable to them. Your ownership of certain assets (such as stocks and bonds) may not be a matter of public record. You may have enough local celebrity that your probate hearing might degenerate into an undignified media event. You may not want your executor to have to take an afternoon off work to appear in probate court. Only you can assess your own desire for privacy, but you should do so with the knowledge that probate is not usually a significant invasion of that privacy.
6. You wish to avoid probate for non-financial reasons, and you own assets that need to be probated.Many people have personal reasons for not wanting their estates probated, and I certainly respect that. I just want my clients to make an informed choice because a living trust can cost more than it saves. Furthermore, a living trust isn't the only way to avoid probate. Many Texas estates do not ever have to go through probate, because the heirs can gain ownership of every asset without having to get a court order proving their entitlement. Assets that can be transferred without a court order include:
* Life insurance. (The insurance company simply makes the check out to whomever you listed as your beneficiary.)
* Pension benefits, retirement plans, or IRA accounts. (Once again, the beneficiary you listed gets the check.)
* Cars titled in certain Texas counties. (The local DMV is authorized to retitle the car in the name of whomever shows up with the old title and swears on penalty of perjury that he is your heir.)
* Joint bank accounts that were owned with right of survivorship.
* Clothing, furniture, books, electronics, jewelry, and other similar items, if your spouse and family and friends will be able to divvy them up without significant argument. (Often, simply showing them an unprobated will or even just a letter that directs what is to be done with these items can settle any arguments.)