Unlike a testamentary trust which is created through a will and doesn’t come into being until you die, a living trust, sometimes called an inter vivo trust, is created and funded while you are still alive. Unfortunately there are lots of advertisements out there that ‘over sell’ living trusts, especially to elderly people. Most people do not actually need a living trust, but there are times and situations where they can be appropriate.
Some Of The Misleading Statements Often Made By Living Trust Sales People
1. “Probate is time consuming.” Probate is what your estate passes through if you have a will or if you die without a will or trust in place. Fortunately Texas has one of the most simplified probate systems in the country. If you don’t really need a trust (see below) then if you have a properly written will your estate can be handled by ‘independent administration’, i.e. without a lot of red tape from the courts.
2. “Probate is expensive.” If you do decide to hire a lawyer to help you probate a will, then if the will was properly written, the lawyer’s fees would likely not be any more than the cost of creating and maintaining a trust. And it actually could be less expensive.
3. “Living trusts can reduce estate taxes.” The US Congress passed legislation in 2013 giving every person the ability to leave up to $5.25 million (double this amount for couples) to their heirs without owing any estate tax, and this number goes up with inflation every year. So only a fraction of the richest 1% of people in the country will pay an estate tax. And even if your estate exceeds this amount, a living trust is not required to take advantage of techniques used to minimize estate tax liability.
4. “Living trusts can help you avoid your creditors.” While you are still alive and even after you die assets in a living trust are subject to your creditors’ claims.
When Might A Living Trust Recommended?
1. You own real estate outside of Texas. As explained above, the probate process in Texas can be very simple and efficient, especially if you have a properly written will. However, if you own real estate in another state, then your heirs would also have to go through probate proceedings in that state, even if you have a proper will in Texas. Setting up a living trust for out-of-state real estate is a way to avoid these additional probate proceedings.
2. You want to give someone the power to manage your assets if you become mentally disabled. Perhaps you fear a debilitating disease like Alzheimer’s could make you unable to handle your financial affairs. A trust would act kind of like a power of attorney, but some financial institutions are not as accepting of powers of attorney as we’d like them to be. However, they do tend to be much more willing to accept and recognize the powers of a trustee over trust assets.
3. You think your will is very likely to be challenged. Trusts can be challenged just like wills, but generally speaking it is usually more difficult to challenge a living trust than it is to challenge a will. This is especially true if you properly operated the living trust for several years before you died. So if you have a particular situation in your family that makes you think there is likely to be a big fight about your will, then a living trust may be right for you.
4. You are an organized person who stays on top of details, or it’s worth it to you to pay someone to stay on top of the details for you. If there is good reason for you to have a living trust and you create one, then that trust must be properly maintained for the rest of your life. Unless you are only creating the living trust for real estate outside of Texas (see #1), then you must make sure that all of your assets are owned by the trust, rather than you personally. If you don’t do this then benefits such as probate avoidance and disability planning are greatly reduced. If you own assets outside of the trust, then there will still be probate proceedings when you die, and the trustee wouldn’t be able to manage those assets outside the trust if you were to become mentally disabled. However, if you don’t think you would be able to keep up with the maintenance of a trust but you still believe there is good reason to have one, then you could always pay someone to maintain the trust for you. Sometimes the additional cost is worth it.