Will Versus Living Trust: Which Choice is Right for You?
When planning an estate, one of the first decisions my clients must face is whether to pursue a will or a living trust. To differentiate, a will is document that disposes of one’s assets upon his or her death through the court-regulated probate system. A living trust, on the other hand, is a trust into which one transfers assets, during his or her lifetime, for the primary purpose of avoiding the need for probate. Essentially, someone transfers assets owned by them individually to a trustee, who holds the asset in trust for beneficiaries. A trust document describes how the assets are to be managed and names successive trustees, thus rendering the death of the original grantor completely inconsequential.
Inevitably, clients hear the phrase “avoid probate” and immediately gravitate towards the living trust, thinking it will save their family time, money, and headaches. I argue, however, that because of Texas’s simplified probate system, it is really not the complicated, resource-draining process some make it out to be. The creation of trusts also brings its own complications to the table. First and foremost, the grantor no longer owns the asset in their individual capacity. That may impact their ability to sell, borrow against, or otherwise encumber the property in ways they would be free to do as individual owners. Second, trusts often carry cumbersome administrative duties, such as annual accountings and separate tax returns. Third, trusts may create unintended friction in families, as trust beneficiaries who previously had no control now have a greater interest in how assets are managed. Lastly, in order to avoid probate, every asset must be transferred into a trust. So often, families go through the trust process, only to discover at someone’s death that they forgot one piece of real estate or bank account. By that time, it is too late to fix the problem, and they must now deal with both a trust and probate.
Despite the foregoing, living trusts are useful tools, and should always be considered when planning an estate. The following are four situations in which a living trust might be a wise choice:
1. When a Challenge to the Estate Plan is Expected
A common feature of modern society is the blended family, in which individuals of various bloodlines are joined into a less conventional family unit. A typical example would be children of someone’s previous marriage now dealing with a new spouse. While many families are able to overcome differences and live in harmony, the situation may encourage someone to challenge a will that (in their opinion) gives more to one side of the family than to another. A living trust can help avoid these sticky situations by two means. First, most will challenges are based on either incapacity (the individual lacked the mental capacity to execute a will) or undue influence (someone was forced or tricked into signing a will). It is much harder to challenge a living trust, which is created during the life of the grantor. This is especially true if the grantor also serves as trustee, as he or can demonstrate capacity through asset management. Second, a trust can have provisions for distributions to various beneficiaries. In the case of a blended family, it can make distributions to all the would-be challengers. If the beneficiaries accept those trust distributions, they will have a very tough time turning around and challenging the trust later. A court would mostly likely say that, because they accepted the benefits of the trust, they are estopped from issuing a challenge.
2. When Someone Owns an Extensive Real Estate Portfolio
If someone’s estate consists of multiple real estate holdings, a living trust might be the best way to hold those assets. In addition to end-of-life planning, estate planning also consists of planning for incapacity, when an individual is found to lack the physical or mental ability to manage his or her affairs. In that situation, powers of attorney (POAs) are typically utilized to ensure a person’s agent can see to their financial and medical needs. In the case of a complex real estate portfolio, however, many title companies and investors are wary of dealing with these POAs. They are typically more comfortable conducting business with a successor trustee than an agent under a POA. In the event of death, a successor trustee can step in immediately, as opposed to an executor under a will, who may take time to get appointed and be subject to court approval. Whether dealing with death or incapacity, the primary benefit of a living trust is the fluidity and seamlessness that the successor trustee can step in. This ability is vital in complex real estate transactions, where deals might move more quickly than other arenas.
3. When Someone Owns Real Estate in another State
If someone lives in Texas, but owns real property in another state, it may be a good idea to place that foreign asset into a trust. If that individual dies in Texas owning that property outright, many states require that some sort of probate occur where the property is located. That often means double the probate proceedings, which can be a real hassle for Texas executors and beneficiaries. This problem can be avoided by placing the foreign property in trust during the owner’s lifetime. That way, the property is already in trust at the time of grantor’s death, and no further action is needed. In this situation, it is important to note that the grantor may need to consult a real estate attorney in the foreign state to ensure that the execution and recordation of the conveyance in done correctly. While that extra step my seem like a hassle, it is typically much easier than managing a full-fledged probate proceeding in a state that may have a much more expensive, complicated system than Texas.
4. When Dealing with a Public Figure or Sensitive Information
If you consider yourself a public figure, or are simply someone who values privacy, there are benefits to utilizing a living trust as opposed to a will. In Texas, all wills submitted to probate must be filed with the county clerk and become public record. From there, anybody with the inclination is able to read it. If the deceased individual is a celebrity, particularly wealthy, or the subject of an interesting story, it is not uncommon for reporters, news agencies, or nosey neighbors to scour wills in search of intriguing details of their life. It may also displease certain beneficiaries to learn that the estate is being passed in a way they consider unfair. Trust documents, on the other hand, are not recorded anywhere, and there is no way for the public to access the contents or beneficiaries of the trust.
Even if the asset is still subject to public record, such as county property records, the trust can still hide the final destination of the real property. For example, say Donald Trump wants to convey his mansion on 123 Mulberry Lane to his best friend, Nancy Pelosi. He could simply convey from “Donald Trump, an individual”, to “Donald Trump, Trustee of the 123 Mulberry Lane Trust”. The trust document, which is not subject to any public record, could then list Nancy Pelosi as beneficiary of the 123 Mulberry Lane Trust. The only thing a snooping new agency would be entitled view as public record would be the deed conveying to the Trustee of the 123 Mulberry Trust.
While Texas’s simplified probate system should alleviate the need for many living trusts, the foregoing situations show that it can still be a useful estate planning tool in many situations. If you are trying to decide whether a will or a living trust is the right choice for you, I recommend speaking with a knowledgeable estate planning attorney. Only by carefully examining your assets, family situation, and estate planning goals, can an attorney inform you of all your options and guide you towards the most effective estate plan for you.