The Living Trust Fallacy in Texas

I constantly receive calls from existing and potential clients about “living trusts” and how they have heard someone talking about how much they need one. My response to most of these people is to ask them a simple question: Why do YOU need one? It is almost inevitable that I get the same answer—“to avoid probate.” When I hear that, I almost have to cringe, because the reality is that in Texas, there is not the need to avoid probate.

Texas has an administration process that is probably the simplest in the nation. It is known as "independent administration", and it means that other than proving the Will is valid, the appointment of an executor, and the filing with the probate court of an inventory of the assets that actually pass under the Will, there is no court involvement in the administration of the estate. The executor handles all matters independent of court supervision, and needs no approval from the Court to sell property, distribute assets, pay expenses, or do anything else that might arise in the regular administration of an estate. This saves time and money, since there is no necessity to go to the Court (incurring legal expenses) for approval of anything the executor needs to get done. Therefore, in Texas, delays or prohibitive costs of probate are not as much of a concern as they are in many states, the way they might be in California, New York or Florida.

Here are some other fallacies about living trusts in Texas:

1. The Estate Tax Savings Fallacy. One of the “big lies” that I often hear about revocable living trusts is that it will help the Grantor (i.e., the person creating the trust) save on taxes. How does it do that? The living trust contains a “bypass trust” to hold the Grantor’s exemption against estate tax upon the Grantor’s death for the benefit of the Grantor’s surviving spouse. This “bypass trust” is the same type of trust that is utilized in Wills all the time. In other words, it is not saving any additional taxes that you would not have saved by using the same type of trust in the Last Will and Testament. Further, if the Grantor is not married, a living trust cannot save anything from an estate tax standpoint. Every asset held by the living trust will be subject to inclusion in the estate of the Grantor, so there is no “tax savings” by transferring assets to a revocable trust by a single person.

2. The Creditor Protection Fallacy. It also cannot protect you from creditor claims (another fallacy that trust salespeople trumpet). Transferring the assets to a revocable trust (at least in Texas) means that the Grantor still has the power to get to the assets at any time. Even if there is an independent trustee, the fact that the trust is revocable means that the Grantor can terminate the trust and have the assets returned at any time. Texas law provides if the Grantor has full access to trust assets, then creditors have that same access.


3. The Cost Savings Fallacy. Because living trusts can (in some cases) be more complicated than wills, they typically cost more. There is also the necessity to transfer title to property (which requires deeds and other title transfer documents), which, if the attorney prepares, adds to the costs. Many times property does not wind up getting transferred to the trust, and you have to probate the Decedent’s Will anyway. If the Decedent had a pour-over will -- a will that says that everything owned by the Decedent flows into the living trust, the administration of the estate would be fairly straightforward and possibly reduce the probate costs. However, I have found that I can typically prepare the Will, and then probate and administer an estate where there is no living trust for the same or less cost than to prepare the trust and transfer all the assets to the trust. To me, the cost savings issue is not that great. However, I am speaking as a Texas attorney, and this likely would not hold true in California or New York.

The only times when I have found utilizing a living trust is a good idea is under the following circumstances:

Real estate in another state -- If you are a Texas resident and own real estate in another state, utilizing a living trust would eliminate the necessity of having to go through a probate proceeding in that state.

Incapacity issues – If you are concerned about incapacity (e.g., you have a history of Alzheimer’s Disease in your family), perhaps a living trust could be utilized to provide for the management of your assets in the event of your incapacity, especially if you have no close friends or family members who would act on your behalf. In that case you might need a professional trustee to manage your assets for you. On the other hand, of you have family members that you trust to manage your assets, a simpler method of the continuing management of the assets would not be a living trust, but general power of attorney naming an agent to handle financial matters for you in the event of your incapacity.

Will contest likely -- If your loved ones are likely to fight over your will, then in some cases (with expert advice and attention) a living trust may make it less likely that someone will successfully contest your plan based on undue influence, lack of capacity, etc.

Many (if not all) of the above situations may not be relevant to you. Thus, a living trust likely is not a viable estate planning alternative if you are a Texas resident. Utilizing a Will, a general power of attorney, a medical power of attorney and a directive to physicians is still likely to be the most estate planning you will ever need. However, as always, you should consult with a competent attorney who practices in the estate planning area to help you make that determination.

Alternatives to Probate Administration for Small Estates in Texas

There are times when the full administration of an estate does not make much sense. For example, what if there is only a couple of assets of the estate, such as a house and a bank account, both of which were solely in the name of the Decedent? The bank account only has about $1000 in it. Do you still have to open an administration of the estate for the sole purpose of collecting the bank account and transferring title to the homestead?

In Texas, there are two alternatives to the administration process; one where there was a Will, and one where the Decedent died intestate (i.e., without a Will). The first alternative is known as the collection of small estates upon affidavit, provided for in Texas Probate Code Sections 137 and 138.

If the Decedent had no Will, and the total value of the estate, not counting the value of the house and other exempt property, was less than $50,000, then you can file an affidavit with the probate court of proper jurisdiction (i.e., in the county where the Decedent was a resident), stating who the proper heirs of the estate would be, using the heirship rules of Texas Probate Code Section 38. Two disinterested witnesses have to swear to the heirship information contained in the affidavit. The small estate affidavit rout is very inexpensive (the filing cost in most counties is less than $75) and in many cases can be done without the involvement of an attorney.

Upon approval of the affidavit by the probate court, all persons or entities dealing with distributees of assets from the small estate are released to the same extent as if they dealt with a personal representative of the estate. Distributees can bring action to force delivery of the estate property and the distributees will be liable to any creditors or anyone else having a prior right to the property. You should note that this procedure does not transfer title to real property, except for a homestead. Thus, if the Decedent owned real property other than the homestead, and had no Will, probably your only alternative is to proceed with a determination of heirship proceeding.

A small estate affidavit usually works well with some assets, such as bank accounts, titles to automobiles, savings bonds and the homestead, but it is usually difficult, if not impossible, to use the affidavit to transfer title to publicly traded stocks and bonds, partnership accounts or brokerage accounts in general. Why? Because most publicly traded stocks and bonds are handled by transfer agents who are located in New York or Chicago, and the people working for these transfer agents rarely deal with small estate affidavits for the transfer of title. They are much more comfortable working with letters testamentary and usually will demand letters before they will transfer the title. With all the trouble it takes to get an order from the court ordering the transfer agent to transfer the stock or bond, you might be better off just going through the administration process to begin with.

What if the Decedent had a Will but few assets, or assets that do not require a lot of work in transferring—all the holder of the asset needs is an order from the court and perhaps a copy of the Will? If there is no need for an administration of the estate, then the Will can be probated as a muniment of title only, as provided in Texas Probate Code Sections 89A through 89C.

This procedure will only be allowed by the court when the applicant can show that (1) the estate has no unpaid debts, excluding debts secured by liens on real estate, and (2) there is no necessity for administration. The will must still be proved valid at a hearing before the court; however, no executor will be appointed. In probating a Will as a muniment of title, it is suggested you utilize an attorney because it is more complex than the simple filing of the small estate affidavit.

The effect of an order admitting a will to probate as a muniment of title is strong in that it is legal authority to all persons (1) owing any money to the deceased; (2) having custody of any property of the deceased; (3) acting as registrar or transfer agent of any evidence of interest, indebtedness, property, or right belonging to the estate; or (4) purchasing from or otherwise dealing with the estate, for payment or transfer to the person named in the will as entitled to receive the particular asset, without any administration. In other words, after the will is admitted to probate as a muniment of title, the beneficiaries of the decedent's estate become the owners of the property outright.

Again, if you are dealing with stocks and bonds, and a transfer agent will only accept letters testamentary rather than an order from a court certified that the beneficiaries in the Will are the only distributees of the estate, then you may not be able to utilize the muniment of title process. In addition, if there are numerous debts of the estate, an administration is the only alternative.

In any event, it is not necessary to create an administration in every instance in Texas, and for those estates with simple assets, the small estate affidavit or muniment of title route may be the way to go. Before pursuing those particular avenues, you should obviously consult with a reputable attorney who practices in this area to determine whether either of these options would be suitable for your situation.

Planning for Domestic Partners

It was a nice trip to Colorado this past week, one of the most beautiful states you can travel to during the summertime. I highly recommend a whitewater rafting trip such as the one we took down the Colorado River, which provided us some of the most majestic scenes you will ever see in the U.S.

One of the things that I encountered in Colorado during my stay at the Broadmoor in Colorado Springs was a gay couple who overheard me speaking to someone about estate planning. One of the ladies asked what would happen to her assets if she died without a Will. After asking a few questions about children (none), potential marriage in a state that allowed for gay marriage or civil unions (no intent) and assets (mostly cash and real estate in her name), I had to inform her that without a Will, most of her assets would pass according to the intestacy laws of her home state, which meant that her partner would wind up with none of the probate assets.

If you have a domestic partner, gay or straight, you are more of a candidate for a Will and basic estate planning than even married couples or a single person with children. Why? Because most (if not all) states’ intestacy laws do not account for domestic partners. You are treated as if you died single regardless of what you consider yourself in your relationship. A married person in Texas who dies without a Will usually winds having all his property (assuming it is community property) passing to his surviving spouse, so the danger of not having a Will is less extreme for that person.

Another tricky scenario—what if the person who died had a child, and the natural surviving parent of the child was unknown (e.g., the child was adopted or the child was the product of in vitro fertilization? Who would be named as the guardian of the child? The law in Texas provides a laundry list of persons entitled to be named, starting with the surviving parent, then grandparents, then siblings, and so on, but there is no mention of a domestic partner. If a sibling of the decedent asserts a claim to be guardian, it could result in a very costly court battle. A Will and/or a Designation of Guardian in Advance of Need could eliminate this problem.

Two other situations also present themselves: Incapacity in general and incapacity for medical purposes. If a domestic partner becomes incapacitated, the law in Texas does not provide for the incapacitated’s partner to be appointed Guardian of the person or estate. Nor does it provide for a partner to be able to make medical decisions on behalf of the incapacitated person. These could be resolved easily through a general power of attorney and medical power of attorney in favor of the partner.

Finally, don’t forget about non-probate assets when planning for a domestic partner. Any beneficiary designations on an IRA, life insurance policy, annuity, or employee benefit plans should be updated to reflect the partner as the primary beneficiary (if that is desired). Other miscellaneous items to also remember are things such as putting the partner as a signor on the safety deposit box or providing for a joint bank account, and providing for a partner to have the right to dispose of the body either by cremation or burial on their partner’s death.