Trusts
Trusts can be a very useful part of your estate plan. There are different types of trusts for different purposes. Trusts can be revocable or irrevocable. A revocable trust can be easily amended or revoked. An irrevocable trust is much harder to amend or revoke. The following is a general overview of some of the types of trusts that are available, and is by no means an exhaustive discussion of trusts.
REVOCABLE LIVING TRUSTS
Revocable living trusts are an excellent estate planning tool when used in the proper circumstances. One of my goals in creating an estate plan for a client is to try to cut down on the complexity of the plan as much as possible, while still achieving the goals of the client. There are pros and cons to having a revocable trust, just like there are pros and cons to using a will in an estate plan. I like to let the client decide whether to use a will or a revocable trust after having a detailed conversation with the client about their specific needs and goals.
What is a Revocable Living Trust?
Revocable living trusts have been used for hundreds of years. A revocable trust is created by an agreement – a trust agreement. A trust agreement will be between the creator of the trust, called a “grantor,” “trustor,” or “settlor,” and one or more trustees. The trustee has a duty to manage the trust assets in a responsible manner and to make distributions to the beneficiaries of the trust as required by the trust agreement.
For most clients, the client will be both the grantor and the initial trustee. The trust agreement usually provides for successor trustees, who will manage the trust assets if the first trustee(s) cannot serve, such as through incapacity or death. After the death of the client, the successor trustee is charged with paying off the client’s debts and distributing the assets to the beneficiaries designated in the trust agreement – usually without a probate proceeding. There are no additional tax returns that have to be done while the client grantor is also serving as trustee. Income is reported on the client’s own 1040 individual return. A revocable trust can be amended as long as the client is mentally competent.
I routinely prepare trust amendments for my clients. The most common amendment is to change successor trustees. A successor trustee may have died, or the client’s children are now mature enough to assume the role of successor trustee. The second most common amendment is a change as to who will inherit the property after the client dies.
A Common Fallacy about Revocable Trusts:
One common fallacy about a revocable trust is “I have been told that I do not need a revocable trust because I do not have a large estate.” A revocable trust can be useful for clients with small estates if the fee charged by the attorney to create the trust is a reasonable fee. I have done many trusts for clients with smaller estates and the trust has made economic sense because the fee charged for the trust is less than the cost of probate.
An example would be a client with a modest home, a bank account, and a very small investment account. A revocable trust is created for that client. After the trust is created, the bank account can either be owned by the trust or made “payable on death” to the client’s beneficiaries. I deed the client’s home into the revocable trust. The small investment account can be placed into the trust by filling out the documentation provided by the financial planner. The assets in this small estate have now been configured to avoid probate. There is now a very high probability that the client can avoid probate. Two probate proceedings may be avoided if the clients are a married couple.
Benefits of a Revocable Living Trust:
PROBATE AVOIDANCE: If your assets are in the revocable trust, you can avoid the cost and time of a probate proceeding. For a husband and wife, you may be able to avoid two probate proceedings in Texas. If you have real estate outside of the state of Texas, you will also be able to avoid probate proceedings in that other state by having the out of state assets in your trust.
PRIVACY: Use of a revocable living trust can provide your estate with more privacy after you die than can be achieved with a will. One of the requirements of probate is that the executor prepare a probate inventory of assets that the deceased owned at the time of their death. A probate inventory lists your assets in detail, including account numbers. A probate inventory is a public record, available to anyone who can pay a nominal fee for a copy. If your estate includes a company that will sell after your death, the avoidance of probate may be a good idea in order to keep a probate inventory from being created that will tip off a prospective buyer as to the opinion of your loved ones as to the value of the business.
ENHANCED GUARDIANSHIP AVOIDANCE: A revocable living trust will allow successor trustees to manage your trust property if you should become incapacitated. A revocable trust is a better way of managing your assets than just using a financial power of attorney. Banks and other financial institutions are more willing to accept a revocable trust and take orders from a trustee than an agent under a financial power of attorney. It is very common that banks and other institutions can be irrational in dealing with a financial power of attorney. If a financial institution refuses to honor a power of attorney, your chances of having to have a legal guardian appointed greatly increase.
Guardianships can be expensive and time consuming, with at least two, and sometimes three, attorneys working on the case. Your guardian will also have to file annual reports with the court. Financial institutions are contractually obligated to follow the terms of your revocable trust and allow your successor trustees to manage your accounts in the event of your incapacity. If someone is having mental competency issues, another person can serve as the trustee or co-trustee from the inception of the trust.
Drawbacks to a Revocable Living Trust:
PROPER FUNDING: If your assets are not in your trust when you die, your estate may have to go through probate if those assets do not have a beneficiary designation, such as a bank account made “payable on death.” Also, on rare occasions, a wrongful death suit has arisen from the death of the client, and the personal injury award is payable to the “estate.” If even one asset that has to have an executor is left out of the trust, a probate proceeding will have to occur. I help my clients fund their revocable trust.
NUMEROUS TITLE CHANGES: A few clients have had many assets that would have to be transferred into the trust, to the point where a probate proceeding would make more sense for that client. An example would be a 90 year old client with 100 mineral and royalty interests scattered about Texas.
EXTRA LAYER OF COMPLEXITY: Clients with very large estates will have many estate planning tools in place, such as limited liability companies, family limited partnerships, and life insurance trusts. In many cases, those clients will have to go through probate in any event, because, invariably, one or more accounts will be left out of the trust. A revocable living trust being introduced into a very complex estate just adds another layer of complexity to an already complex state of affairs. One of my goals for any client is to accomplish that client’s goals with the least amount of complexity and confusion.
Things that a Revocable Trust will not do:
NOT AN ASSET PROTECTION VEHICLE: A revocable trust will not protect your assets from court judgments arising from lawsuits. However, you will still maintain your homestead protection from lawsuits if your home is placed into your trust.
WILL NOT PROTECT ASSETS FROM MEDICAID SEIZURE: A revocable trust will not protect your assets from medicaid seizure, and the assets in the trust will be counted as “resources” for medicaid purposes.
By Bill Wollard
Also see Dallas Wills Attorney for information about will formation and execution.