Living trusts have become more popular as estate planning instruments, but are they always the best option?
What is a Trust?
A trust is one way to attach instructions to a set of assets. For example, you might put funds in trust for your granddaughter with rules for when it pays out: Maybe she has to graduate from a 4-year college and reach age 25 before the trust pays out. Or maybe she gets 1/3 of the funds at 25 and the rest at age 30. The rules are really up to the person who creates the trust and contributes the funds. They can be as simple or as complicated as you like. A revocable living trust is unique because you can still freely access the funds you’ve put in trust for as long as you live.
Trusts in Estate Planning
Because trusts can be used to set aside money with instructions for use, they can be tools for giving away assets after you die. This is especially the case in states where using a will to distribute your assets is more costly. For example, in California, a $500,000 state distributed could cost around $26,000 to distribute with a will. A million-dollar estate would be closer to $46,000. These fees come from a mandatory court process that a will must undergo, called probate.
By contrast, assets distributed using a trust do not need to go through the same probate process, often saving the family time and money. This is one of the reasons trusts have become so popular in states with costly probate procedures.
Living Trusts in Texas
In Texas, probate is often much quicker and more cost-effective than in states like California. In large part, this is because Texas allows for what’s called “independent administration,” which is essentially means that the distribution of assets can happen without the supervision of the court. There must be an initial hearing to show the will is valid, but after that the family can handle the administration without ever going back to court — so long as the will has been drafted correctly and other requirements are met.
So, if probate is easy and cheap in Texas, do we really need living trusts here?
The short answer is no. Trusts are usually more expensive up-front and require a bit more maintenance and attention throughout your life. For many people, it just doesn’t make sense to use a trust when a will can get the job done just fine.
However, that’s not to say that a trust is never the right option. Here are some reasons to consider a trust — beyond just avoiding probate.
Why Choose a Trust?
- For Privacy. As part of the probate process, a will gets filed in the public record. However, a trust document doesn’t need to be made public in the same way.
- For a Quick Transition. Even if probate costs are lower in Texas, it still does take some time to probate and then administer a will. A trust instrument is effective immediately on death, meaning beneficiaries don’t have to wait to access funds — unless of course the trust document itself requires it.
- For Business Continuity. Ownership interests in a business are also part of your estate. If the slow march of probate might inhibit important business decisions, you’ll want to find a way to pass along those interests faster. A trust is one way; a buy-sell agreement is another.
- For Control. If you don’t want to give assets to someone outright, but instead want to make the funds conditional or earmarked for certain things — like education or housing — a living trust might be one option. However, you can also create a trust in your will, called a “testamentary trust,” to accomplish the same purpose and potentially at less expense.
- To Deal with Out-of-State Property. Texas wills can govern the disposition of all your property anywhere in the world — except dirt. So an Illinois-based bank account can get distributed with a will, but not an Illinois condo. Your family (or whoever you appointed as executor) will have to go through the probate process in every state where you own real estate. By putting all your real estate in a trust, you can avoid that inconvenience and expense.
