by Jason Lemons
It’s almost inevitable. Someday – most likely around 4 p.m. on a Friday afternoon – a potential client will come into your office, certain that they need a living trust. They may have gotten this advice from a relative, attended a seminar or heard about living trusts on television from a syndicated personal finance expert. No matter where they received their information, your client is convinced that a living trust is the only mechanism that can protect their estate from excessive taxation, unwieldy probate expenses and other very bad things. While you attempt to conduct your customary intake interview, the client keeps peppering you with questions about trusts.
It’s moments like this where the “counselor” in “attorney and counselor at law” becomes very important. The fact is that revocable living trusts are frequently touted as the surefire way to avoid time-consuming and expensive probate proceedings, reduce estate tax burdens and protect the privacy of settlors and beneficiaries. Well-tailored sales pitches from overzealous financial services salespersons and celebrity personal finance commentators can overwhelm the average person and, in some cases, can trick susceptible consumers into purchasing fraudulent annuities and other investments. Sadly, seniors tend to be most vulnerable to these types of scams. Hopefully your clients have not fallen prey to these aggressive tactics and you can take the time needed to properly educate them and determine exactly what they need.
Whenever someone walks into your office with questions about living trusts, you should first ask them why they think they need one. Probate avoidance is one of the most common reasons cited by clients. However, the probate process for most estates in Texas is relatively inexpensive and easy. In fact, it’s likely that the time and expense involved in creating and administering a revocable living trust will exceed the cost of administering the estate through the typical probate channels.
Some may mention protection from creditors as another reason; however, it’s important to explain that revocable living trusts do not protect settlors from creditor claims. Other clients may suggest that a living trust will help them reduce their tax burden. Yet revocable living trusts are transparent to the Internal Revenue Service; because the settlor exercises control over the property contained in the trust, the IRS almost always ignores the trust and considers any property held by it to be owned by the settlor outright. And despite promoters’ claims to the contrary, a revocable living trust creates no more tax savings compared to a properly drafted will creating a family bypass trust.
There are scenarios in which a revocable living trust makes sense for a client. For example, if your client owns property outside of Texas, a living trust is helpful for avoiding out-of-state probate proceedings – particularly in states with complicated probate laws. In addition, a revocable living trust is valuable for settlors who anticipate future incapacity, allowing them to manage their property in the present and then hand over these duties to a trusted friend, relative or institution when they are not capable of doing so later. On that same note, a living trust can help its settlor escape a potentially costly, burdensome guardianship proceeding upon his or her incapacity. Also, if your client anticipates that a will contest is likely after his or her death, a living trust acts as an additional roadblock to any heir that opts to contest the will.
Another frequently cited advantage to living trusts is the privacy it affords its settlor, since the assets held in trust would pass outside of the probate process. However, the Texas Legislature recently amended Section 250 of the Probate Code, allowing independent executors to file an Affidavit in Lieu of Inventory, Appraisement and List of Claims that prevents the public disclosure of probate inventory, provided that all unsecured estate debts are fully paid at the time the inventory is due. A full, verified and complete inventory still must be prepared and furnished to all estate beneficiaries, but it is no longer necessary to file the inventory in the public probate records. If your client’s estate qualifies, this affidavit can effectively eliminate one of the more influential reasons for creating a revocable living trust in Texas.
Even after having this discussion with your client, they may still insist that they need a revocable living trust to fully protect their estate. At this point, you should remind them that a living trust is valuable only so long as it is diligently administered. To the layperson, a revocable living trust is just another document in their estate plan; if they have not been properly educated about trust administration, it’s likely that they will allow their living trust to gather dust along with their other estate planning documents. To be effective – especially for probate avoidance purposes – the ownership of all estate property that can potentially pass through probate must be transferred into the trust. This is a lifetime commitment, and one that many people acting as trustees may lack the discipline to stay on top of.
Lawyers are notorious for answering their clients’ questions with the phrase “it depends.” However, the necessity of a revocable living trust is one of those subjects in which this answer is applicable. To the majority of desperate clients that walk through your door late on Friday afternoon, a living trust is simply not necessary. To others that fit some of the criteria listed above, a revocable living trust could be a valuable tool – provided that they understand how it works and how to properly administer it. Either way, it is our responsibility as legal counselors to help each client fully understand how to best manage their estate while they are alive and after they pass on. Fully educating our clients may not be beneficial to trust mills and personal finance gurus in the long run, but it’s the right thing to do.
Jason Lemons, a partner at Lemons & Hallbauer, practices business, estates and probate law in Richardson, Texas. He can be reached at firstname.lastname@example.org.