What is a living (or loving) trust?

To a lawyer, a living (or loving) trust is a revocable intervivos trust. It is a trust that can be revoked. If you establish a trust and then decide it is not working as you wanted, or something better comes along, you can cancel it. It is intervivos, it is created during life. This is in contrast to a testamentary trust, which is a part of your will and pops up on your death.

A living trust is the generic name for a trust that is generally promoted as avoiding probate. A loving trust is a copyrighted name for a type of living trust.

Is a living trust right for me?

It may be but they are not right for everyone. Over the last 10 years these trusts have been touted as the modern way. Many insurance agents and financial advisors have used ads for living trusts as leaders to hold "seminars." Those meetings, generally at some local hotel, not only extolled the virtues of living trusts but also were an opportunity to sell life insurance or other financial services.

The interest in living trusts was driven by people's general fear of dying, lawyers and probate. This was augmented by family stories and people moving here from other states.

Family Stories. Almost every family has a story of the problems that occurred when grandfather died. These stories tend to depict the probate process as an expensive and heart- rending villain. If that is true, grandpa died before 1954 under the old probate system. Otherwise, the problems surrounding grandfather's death were the result of poor planning, tax problems, creditor problems or family battles. None of these problems are solved more by a living trust than a will.

Immigrants from Other States. In some states, California is an excellent example, the probate process is very unwieldy and expensive. Almost all well-informed Californians have a living trust. When these people, and people from other "probate challenged" states, move to Texas, they bring those beliefs with them. Their concern with probate is spread to other Texans.

What are the advantages or uses of living trusts?

Trusts generally are a marvelous invention. They are extremely flexible and can accomplish a variety of tasks. Living trusts are no different. While it is generally referred to as a probate avoidance device, it can serve several functions:

1. Avoids Probate. If all of your assets are in the trust at the time of your death, there will be no need to probate your will. Actually, your non probate assets, life insurance retirement benefits, etc., do not have to be in the trust, they also pass outside of the will. But it is important to make sure that your estate is not named as the beneficiary of any of these assets.
    
2. Provides Privacy. Because probate is not that troublesome in Texas, this is one of the primary reasons for a living trust in Texas. When a will is probated, all of your probate assets have to be listed on an inventory and filed with the clerk as a part of the public record. That is not true of assets in a living trust. If privacy of assets is important, a living trust may be appropriate for you.
    
3. Provides management of some or all assets. Some people use it as a device for third parties, a child or a trust company for example, to manage particular assets. With a child this is sometimes used as a training device.
    
4. Provides Standby Management of Assets. When the trust is coupled with a durable power of attorney, the trust is ready to receive assets if you become incapacitated.
    
5. Avoids the Possibility of Guardianship of the Estate. If all of your assets are in a living trust and you become incapacitated, there is no need for a guardian of your estate. Your successor trustee will continue to manage your assets. Note that this does not solve the need for a guardian of the person.
    
6. Avoids second probate in an other state where real estate is owned. People who own real estate in another state are subject to a second probate. Each state in the United States controls title and ownership of its real estate. A will probated in Texas has no effect on real estate in Colorado. For it to be effective there has to be a second probate in Colorado. If you place the Colorado real estate in a trust, at your death the trustee can transfer the real estate to your beneficiaries without a probate proceeding.
    
7. Can reduce risk contests [not avoid contests completely]. This is often oversold as a complete cure for contests at your death. Obviously if you have a trust rather than a will, there will not be a will contest. The fact that there is a trust contest instead does not completely eliminate the problem. However, if the trust has been managed by a third party, someone other than the decedent or the persons involved in the litigation, the best example is a trust company, it will provide substantial third party evidence of the decedent intent and capacity.
    
8. May Defeat Elective Rights. In Texas surviving spouses have certain rights: widow's election, homestead and allowance in lieu of homestead. If all of your assets are in a trust, those rights may be defeated. There is no Texas law to tell us if trust assets are subject to these rights.

What are the disadvantages of a living trust?

Like everything, living trust have their negatives.

1. More expensive to set up. If a living trust is to be funded, documents must be prepared to transfer the assets into the trust: deeds for real estate, assignments for notes and insurance policies, as well as other documents to transfer stocks, bonds and bank accounts. With a will none of this is necessary, at least not until someone dies. Those transfers are a basic part of the probate process: transferring title to the beneficiaries. One wag once said that a living trust is like going through probate twice.
   
   For some people this cost and the other issues identified below are worth the trouble. The job of the attorney is not to make you take something you do not want, but rather to help you see the pluses and the minuses of your choice before you act.
    
2. Some expense to maintain during life. Living trusts require more care and management than a will. With a will, it goes into a drawer and until the will is probated, there is no day-to-day maintenance. A living trust requires some level of maintenance.
    
3. Some headache to maintain during life. It takes very little effort to maintain your property in your own name. However, to make sure all of your assets stay in the trust requires constant vigilance. The new accounts person at the bank may very well open your new account in the name of Jerry Jones rather than Jerry Jones Trustee. Likewise, the title to your new car may come from the state in the name of Jerry Jones, not Jerry Jones Trustee. A result of the dealer's error.
   
   Many people, as they get older, prefer to simplify their lives. A fully funded, self trustee, living trust does not simplify matters.
   
   At the same time I should say I have been warning people about this issue for years. However, many people have elected to have a living trust. I have watched them go out of my office and wondered how effective it was going to be. Several of them have now returned to my office after several years and their trusts are in very good order. The result is very little additional lawyer's fees and probate is avoided.
   
   I think it depends on the type of person and their level of determination to properly run the trust.
    
4. Maintaining extra set of books on trust assets. To be effective, you will have to maintain a separate set of books on the trust.
    
5. Filing second set of tax returns on trust income. With one exception, trusts require a separate tax identification number and each year you must file a separate income tax return. The exception is an important one. If the trust is self trusteed, if you are your own trustee, you may report all of the trust's income and deductions on your personal return, using your social security number.
    
6. Homestead: Risk of loss. Until recently we were concerned about losing the homestead deduction for ad valorem tax purposes. Several years ago the Texas legislature made clear that transferring your home to a living trust would not cause you to lose your homestead exemption.
   
   We do not have the same comfort regarding creditors. Your home is exempt from your creditors. There is no law in Texas to tell us if your home is still exempt from creditors if it has been transferred to a living trust. People should be very slow to risk the loss of that valuable right.
   
   Many people solve the problem by transferring assets other than their home into the trust.
   
7. Due on Sale and Title Insurance. When transferring real estate to a trust, the due on sale clause must be considered. Generally this is not an issue for mortgage holders, however, it is prudent to get their consent or determine in writing that they have no objection. Likewise, the effect of the transfer on title insurance must be considered.

Are there any myths that surround living trusts?

Yes.

1. Living trusts save taxes. This is not true. Wills and living trusts are virtual tax equivalents. A will (sometimes with a testamentary, or popup trust, in the will) can save the same taxes that a living trust can save.
    
2. A living trust is cheaper than a will and probate. Sometimes, sometimes not. It depends on your situation. If the trust and the necessary transfer documents do not cost a great deal more than a will, and probate is in fact avoided, it can be cheaper. This needs to be analyzed very carefully.
    
3. Lawyers charge a percentage of the estate for probate. This is rarely the case anymore. Years ago the State Bar of Texas had a minimum fee schedule that provided for a 3% fee for handling an estate. I know of no lawyers that currently charge a percentage. If you ever find yourself in the office of one that does you should be very leery.

How do I decide if I need a living trust or a will?

Only after conferring with a competent attorney that you have hired can you determine if you want a will or a trust. There is no substitute for an attorney who has been hired to give you his best advice. You should be extremely cautious of any attorney who has been provided to you by third parties. They are subject to divided loyalties. They will have a bias toward whoever is paying their bills. Before you act, you should consult with an attorney.