A common question in our practice is whether to rely on a will or go to the extra effort and expense for a revocable trust. From newspaper articles to movies and cocktail parties, everyone seems to have an opinion. In those settings, people hear that probate is scary, wills are public and sometimes contested. While probate can be expensive and time-consuming in some other states, fortunately, as Texans, our probate process is streamlined. As long as you hire a lawyer with experience in probate court, you have a well-written (and properly attested) Will, and nobody files a lawsuit after your death, then probate is typically not so bad. We try to explain the probate process in Texas to our clients and advise them that while revocable trusts can be a great planning tool, they are not always necessary. I’ll try and lay out some of the key pros and cons in deciding whether to create an estate plan with a trust or a will-based plan.
Benefits of a Trust:
Avoid Court. Some assets–such as life insurance, IRAs, and certain types of bank and brokerage accounts–pass directly to named beneficiaries. We call these “Non-Probate Assets”. If property passes under a Will, then the Will must be probated at the courthouse (“Probate Assets”). Probate usually involves hiring a lawyer to assist the Executor named in the Will, filing certain papers with the court, attending one or more hearings, and providing a written inventory to the court valuing the properties which passed under the Will. Note, though, in many circumstances, the filing of an inventory can be waived under current Texas law, and instead, the executor is permitted to file a document called “Affidavit in Lieu of Inventory” which states that an inventory was prepared and given to the estate’s beneficiaries, but that inventory does not need to be filed with the court.
Some clients prefer to avoid even this relatively straightforward involvement with the court, so they opt for a living trust. By transferring all of your Probate Assets (the assets that would otherwise pass under your Will) to a living trust, you can avoid the court entirely. For estates which don’t owe estate taxes, there is usually less work for the lawyers, and that translates into reduced estate administration costs.
Privacy. When a person dies with a Will, their Will is filed with the Court along with the notice to the named beneficiaries. Also, an inventory must be filed with the court (unless an Affidavit in Lieu of Inventory is filed, as discussed above). You may not want your friends, neighbors, or the media to be able to read a listing of what you own and what it is worth. After all, an inventory is a public record. With a living trust, your properties and their values are all kept private.
Possible Future Incapacity. You may be worried that one day you won’t be able to manage your own finances, and you may want to name someone to handle these types of matters for you. You can address this potential problem with a power of attorney or with a living trust. A power of attorney will usually be accepted by banks, title companies and the like, but there is always the risk that an institution’s legal department will reject it. The same person who may be denied the ability to use a power of attorney will likely be allowed to do anything he or she wants when acting as trustee of a living trust.
Harder to Challenge. If you are planning to disinherit one of your children or grandchildren, you may be better off with a living trust because there is nothing filed at the courthouse. Also, it is a little harder to contest a living trust than a Will. Many people are interested in doing as much as possible to prevent a successful challenge to their estate plan. Please note that the grounds to contest a Will in Texas are limited (lack of capacity of the person writing the will, the person was unduly influenced to write the will, fraud and improper execution).
Drawbacks of a Trust:
Time-consuming/expense to Set up. Depending on how many different types of properties and accounts you own, it can require a significant effort on your part to switch everything over to the name of your living trust. Also, some financial institutions are not familiar with living trusts, so you may encounter a little trouble and frustration in getting the trust fully established.
Complicated. Wills are usually shorter and simpler to understand than living trusts. Also, with a Will, you can sign it and forget about it. But with a living trust, you need to put your property into the trust and run your life out of it for as long as you live. For many people, this downside outweighs all the potential benefits.
Time and Energy to Revoke. You may decide at some point due to changing life circumstances you don’t want the trust any more. At this point, you will need to return to every bank and brokerage house, and undo everything you had done to establish the trust. You can expect more lawyers’ fees too.
Post-Death Costs Not Eliminated. If you have a taxable estate (which is generally an estate over [$12,920,000 in 2023), there will be a lot of work to be done after death regardless of whether probate is required. Typically, there are tax returns to file, trusts to establish, assets to value, and more. Avoiding probate will only marginally reduce the cost of administering a taxable estate.
Probate Needed if Trust Not Fully funded. If you leave just one bank account or one piece of real estate out of the trust, probate will still be necessary. And probate takes about as long when there is one asset as when there are twenty.
As always, please feel free to contact us if you would like to set up a trust and/or update your Estate Planning.