Myths about “Living Trusts”

 

Contact Arthur Geffen: ageffen@dallasestateattorney.com

Revocable trusts have become increasingly popular as substitutes for wills in estate planning. Many people believe that by creating a trust, naming themselves as trustees, and transferring their assets to the trust, they will save taxes, simplify the administration of their estates, and save money for their children or other beneficiaries. Unfortunately, these beliefs are not based in fact, and are typical of the myths that surround so-called “living trusts.”
Myth # 1: Living trusts save taxes.

This is absolutely wrong. All of the assets in a living trust are subject to both state inheritance taxes and the federal estate tax. A living trust also saves no income taxes during lifetime and may actually increase income taxes after death, because many of the income tax rules for trusts are not as favorable as the income tax rules for estates.


Myth # 2: A living trust is cheaper to administer than an estate.

This may be true for some persons in some states, but the generalization is wrong more often than it is right.
In Texas, the much-feared “probate of the will” usually takes less than an hour. The real work in the administration of an estate is the collection of the decedent’s assets, the payment of debts and death taxes, and the distribution of the remaining assets according to the will. The administration of a living trust is almost exactly the same, because the trust assets must be collected, the debts and death taxes must be paid, and the remaining trust assets must be distributed. The only advantage of a living trust is that if the decedent was not the trustee, the time and expense of searching for assets and transferring them to the executor might be avoided. That advantage must be weighed against the time and expense of transferring assets to a trustee during lifetime, as well as the inconvenience and loss of control when assets are held in the name of a trustee.
Because the steps necessary to settle a trust are similar to the steps necessary to settle an estate, the legal fees should be about the same, and the executor (or trustee) should be able to negotiate a reasonable fee agreement after comparing the fees of different lawyers. Legal fees for the settlement of an estate will be higher than the fees for the administration of a trust in those few states (such as California and New York) that have complicated probate procedures or a statutory fee schedule for lawyers. In those states, having a living trust may help to reduce legal fees.
Myth # 3: A living trust can be distributed faster than an estate.

This is also wrong. There is no law preventing an executor from distributing all or any part of the estate at any time, as long as the executor is willing to assume the risk of loss if there are additional debts or taxes, or if the distribution is incorrect. (As a practical matter, most executors are reluctant to distribute assets until the death taxes have been settled, which can take from nine months to two years.) The trustee of a living trust is also liable for debts and taxes, and may delay distributing assets for the same reasons.
Conclusion: Living trusts are good for some people, but not for everyone.

Living trusts have both advantages and disadvantages, but most people don’t need them and shouldn’t have them. A living trust is most likely to benefit someone who lives in a state with complicated or expensive estate administration requirements (not Pennsylvania or New Jersey), who has life insurance or retirement benefits which need to be held in trust after death (because of minor children or for tax reasons), who owns real estate in other states (which might require probate proceedings in those other states), or whose investments are already being held and managed by some other person and that other person could serve as trustee at little or no additional cost.