ValueYourMoney.org
Retirement and Estate Planning
 

You May Not Need That Living Trust
After All

By Teresa McUsic, “Savvy Consumer” syndicated columnist

Texas may very well be the only state in the union where most people do not need a living trust.

Local estate attorneys, retirement planners, the state bar and even the attorney general all say Texas has a model probate system that is inexpensive and time efficient, making the need for a living trust limited to address only a handful of specific cases and not necessary for the public at large.

Living trusts rarely necessary
R. Blair Norman, one of 58 attorneys in Tarrant County board certified in estate planning and probate law, said he recommends living trusts only about 10 percent of the time to his client base.

“If you have a well-drafted will appointing an independent executor, probate is very simple and inexpensive,” said Norman, who teaches a six-week continuing education course on estate and probate at Texas Christian University twice a year. “Most of the time what I see is a person buys a living trust, never funds it and then the heirs have to go through probate anyway.”

Living trust defined
A living trust is a legal arrangement which allows another person to assist in managing your assets while you are still alive if you become unable to do so and distributing your assets after your death. The property and assets that are transferred to the living trust will not be subject to the probate process when you die.

While avoiding probate is an issue in virtually every other state in the country, it is not a problem in most cases in Texas if the deceased had a will, said Steve Blankenship, a certified financial planner with Heritage Financial Planning in Grapevine.

“For any state outside of Texas you generally need a living trust,” he said “Here it’s a lot of hassle for not a lot of benefit.”

Benefits of Texas’ probate system
The simplified Texas probate system requires the executor of a will to have just one court hearing, file a list of assets called an inventory and file a notice to creditors without any further court oversight, Norman said.

“We’re darn independent in Texas and always have been,” he said. “The idea of a judge telling us what to do doesn’t sit well here. Independent administration basically allows the executor to do the things they need to do without court supervision.”

Elderly Texans: beware of the scam
The explosion of living trusts nationally with recommendations by Suze Orman and other financial advisors in the media spills over into Texas, however. On top of that, the selling of living trusts has turned into a popular scam where promoters prey upon the elderly.

“Too often, the sale is made without regard for whether a living trust really is in the client’s best interest,” said Texas Attorney General Greg Abbott in an alert to senior citizens. “The fact is, for a majority of seniors, a living trust is not preferable to a will and a durable power of attorney.”  

Living trusts can be sold in kits costing anywhere from $500 to $5,000, sold by promoters who use free meals and high-pressure sales tactics laced with inaccurate or misleading information. Or the promoters sell the living trusts kits for a lower price and use it as a hook to sell annuities and other investments to seniors.

Usually an attorney drafts the living trust, but in many cases salespeople selling the trust kits are the only ones who actually see the client. Often an attorney working with the salesperson drafts the trust on the basis of instructions from the salesperson without ever meeting the client or doing the necessary follow-through of placing their assets in the trust, Norman said.

Assets can be misappropriated
Another complication to heirs is when assets are inappropriately placed in a living trust, he said. Ownership of some assets IRAs and 401(k)s should never be changed into the living trust. Assets like life insurance should have named beneficiaries and will not be subject to the probate process. Other assets like title to a house or vehicle or banking accounts can have multiple names for joint ownership.

“Some of our clients have spent a lot of money on living trusts before they come to us,” said Burke Rosenthal with Rosenthal Retirement Planning in Fort Worth, adding that less than 5 percent of his clients have living trusts. “In a lot of cases, they were never funded.”

Living trusts require continuous updating
Another problem financial planners and attorneys see with living trusts is they have to be continually updated if new assets are acquired.  Any acquired asset that isn’t placed into an established living trust that will require the estate to go through probate, anyway.

Tax advantages may not be there
One misstated selling point to a living trust is that it gives tax advantages, said Wayne Frank Paul, a Grapevine attorney.

“We see that all the time,” he said. “They imply that with a living trust you will save on estate and gift taxes.”

But any tax strategies you place in a living trust can be put into a well-drafted will that contains tax planning provisions, he said. There are no tax advantages specific to a living trust.

When a living trust is recommended
Although most people do not require a living trust, there are times when a living trust is appropriate.

Here are some of the major reasons to get a living trust:

  • You have property out of state. This will force you into probate court in other states that are not as progressive as Texas probate courts.
  • You are facing a debilitating disease like Alzheimer’s that will make you unable to continue to handle your finances.
  • You absolutely know that your will is going to be contested.
  • You want your estate holdings to remain private. Probate court documents listing assets are available to the public.

Think through the pros and cons
Norman suggests sitting down with an attorney to discuss the pros and cons of a living trust.

“Get educated about your options, get a second opinion if you like, and then make your decision based on your individual circumstances and estate planning goals,” he said.

For more information on living trusts:

  • For a free copy of “Living Trust Scams and the Senior Consumer” by the State Bar Association of Texas call (800) 204-2222 ext. 2610 or go to www.texasbar.com and look under publications.
  • For a free copy of “Product Report: Wills & Living Trusts” from AARP call (800) 424-3410 or go to www.aarp.org.

Copyright 2006, Teresa McUsic