April 28th, 2022
The single greatest point of confusion for our clients is whether they should transfer their assets into a revocable living trust. Revocable living trusts (commonly referred to as RLTs) have surged in popularity in recent years and have quite a bit of buzz surrounding them. Revocable living trusts have a number of advantages and disadvantages, and whether they are right for you depends on your situation and estate planning goals. Below, we break down the differences between wills and trusts, discuss the advantages and disadvantages to each, and answer some common questions we get when deciding between a will and a trust.
First and foremost, it’s important to understand the difference between a will and a trust.
What is a will? A will is a written document containing your instruction for distributing your assets when you are gone. Wills generally include the appointment of an executor, who is given the authority to carry out the distributions contained in the will. Ideally a will in Texas will also allow for an independent administration that minimizes the Court’s role in probating the estate.
Importantly, wills are not effective until you pass. People often prepare, revise, and recreate their will multiple times throughout their life to address life changes and the evolving situations of their descendants. When you pass, if you have a valid will in place, only that final will is probated in court. While probate in Texas is cost effective and efficient when compared to other states, it is not free and it is not private. Instead, an attorney will be needed to probate the will, and the will itself becomes a matter of public record.
So, what is a trust? There are many different types of a trusts, but for this article’s purposes we are going to talk about revocable living trusts, which are the single most popular type of trust implemented in estate planning. Unlike a will, a revocable living trust is a legal entity that immediately come into existence to take legal control of the grantor’s assets. This is not as scary as it sounds! The grantor of the trust often appointed as the trustee of the trust, and has full control over trust’s assets. In fact, the grantor(s) carry on with his/her life and finances just as they did before creating the trust, and have no special tax reporting obligations as a result of the trust’s existence.
Because trusts are immediately effective and take control of a person’s assets during their life, a properly funded trust can make things easier on your loved ones when you pass. This is because trusts do not go through probate. Upon the grantor’s death (or the last to die grantor in the case of a joint trust), the trust goes from being revocable to irrevocable. Once the trust is irrevocable, the terms of the trust are governed by the trust instrument with the trustee (or successor trustee) of the trust managing the trust pursuant to the trust’s own terms. What does this mean for you? Well, it means that there’s no probate for assets contained in the trust. It also means that you can have some control over the trust’s assets after you die. This gives many people comfort to know they can structure and provide for loved ones long into the future if that is their desire.
First of all, any asset that is not properly transferred into the trust will need to pass via probate. This means that just creating a trust is not enough- you have to fund the trust during your life, and be sure that probate assets are held in the name of the trust and non-probate assets list the trust as a beneficiary. This will require diligence during your life, including some upfront work to retitle your assets to fully fund the trust.
The primary benefit of a will (with or without a testamentary trust) is that it is simple. Once your will is signed, you are done and no assets need to be retitled in the name of a trust. This is particularly appealing to our young clients, who have only created an estate plan in the event of an unexpected catastrophe, and have no thoughts of dying imminently.
The primary disadvantage of a will (even with testamentary trust) is that your estate will have to go through probate. In Texas, probate is straightforward and inexpensive, so it is actually not as big of a burden as people believe. Still, it’s an extra step that will have to be taken prior to distribution of assets. Furthermore, probate is public. An inventory is filed in probate court, which some people find to be a violation of their privacy. While wills do not provide for incapacity planning, this can be handled separately through a statutory durable power of attorney, which allows you to designate an individual to handle your finances if you are incapacitated.
Yes and no. If you create a revocable living trust and do not transfer your house into the trust, your house will still need to go through probate when you pass. For many, this defeats the purpose of the trust to begin with. In Texas, you can work around this issue through a transfer on death deed that provides instruction for passing ownership of the house once you die.
The short answer to this is no. During the grantor’s life, the revocable living trust’s taxes will be the same as the grantor’s taxes would have been without creating a trust. Once the final grantor has died, however, the trust becomes irrevocable and has additional tax reporting requirements.
Yes! Unless your trust has been perfectly funded with all probate assets owned during life, you may have assets that have not made their way into the trust when you die. These assets would need to go through probate, and will pass according to the terms of your will (or else via intestate succession if you do not have a will). Often times a will that accompanies a trust will simply direct all assets into the trust. Still, a will that gives these instructions is an important safety net in the event that probate assets exist outside the trust.
Want to learn more about how easy it is to prepare a will or establish a Trust? Call the Heights Law Group to find out how we can make planning your estate easy, fast and affordable.
Contact us today at (832) 810-3373 to find out more.