"Living Trusts" and "Living Wills"

Many people are confused about the difference between a "living trust" and a "living will". A "living will" is not really a will, because it has nothing to do with your property. A living will is the common name for what is actually a "directive to physicians." A directive to physicians, (a.k.a. living will) tells your doctor whether you want to be kept alive on artificial life support in case of a terminal or incurable medical condition.

A "living trust," also known as an "inter vivos" trust, is an instrument that may be used as a substitute or in addition to a will, to distribute your property. Senior citizens are often approached by salesmen who may give false or misleading information about the benefits of a living trust. Living trusts are a useful tool for some people, and are not helpful for other people. I have seen people spend thousands of dollars on a living trust, only to revoke it because it caused complications and did not accomplish the desired goals.

When is a living trust a good idea? You should discuss your individual situation with an attorney who has your best interests in mind, rather than be persuaded by someone who has a goal simply to sell you a trust. It is true that a trust may be helpful to reduce or eliminate estate taxes. However, most people in Texas do not have an estate tax. A living trust is not the only way to reduce or eliminate estate taxes, but it may be a good idea if your total estate at death will be worth at least $2 million, (if you die before the year 2009).

Here are some common misconceptions regarding living trusts:

1. Can a Living Trust save taxes? It all depends upon your situation.

Yes, if you have an estate tax, a living trust is one way to reduce or eliminate the estate tax. For many people, there is no estate tax. Until the year 2009, you must have at least $2 million in your estate before an estate tax is levied. If you die before 2009 with less than $2 million, current law says you have no federal or state estate tax in Texas. Current law states that in the year 2009, your estate will not be taxed unless it is at least $3.5 million, in 2010 the estate tax is scheduled to be repealed altogether, and in 2011, the estate tax is to be reinstated for estates of at least $1 million. So for a person who expects to live at least until the year 2011 who has an estate of at least $1 million, some type of estate tax planning should be done, but the law may change. The law that applies is the law in effect on the date of your death.

For an individual with valuable real estate, there is a capital gains tax upon the sale of real estate to consider, as well as the estate tax. It may be better to increase the basis of the real property for capital gains purposes by putting the real estate through probate, if the estate tax can be reduced by another method.

2. Can a living trust help you qualify for public assistance benefits? No.

A living trust will not cause you to qualify for public assistance such as Medicaid benefits for a nursing home.

3. Can a living trust help you avoid your creditors? No.

During your lifetime, if you knew or had reason to suspect the existence of the creditor, then transferring your property into any type of trust will not help. If your trust is revocable, as most living trusts are, then it will not help you with creditors. Generally, if the property can be used for your benefit in any way you please, then you must use it to pay your creditors. Only in very narrow and specific circumstances can a trust help with creditors who were not in existence at the time the trust was created, and that type of trust is not normally called a "living trust."

4. Can a living trust help you avoid probate? Sometimes.

If everything you own is in the living trust at the time of your death, then your estate has no property to go through probate. However, the cost of setting up a trust can sometimes exceed the cost of creating and probating a will. In my law practice, I have seen many estate beneficiaries find after their loved one has died, that while the decedent thought they had avoided probate by setting up a living trust, there was some property that was never properly transferred into the trust. It is quite common to probate a will of a person who had a living trust. A living trust is not the only way to avoid probate, and in Texas, the probate of a uncontested self-proved will may be less expensive and less trouble than creating and maintaining a living trust.

5. Can a living trust help you avoid a contest? Not likely.

Trusts are not wills, so they are not subject to "will contests," but trusts can be contested. If a beneficiary wants to claim fraud or contest your mental capacity at the time you created the instrument, that can be done with either a will or a living trust. It is true that a living trust is more private than a will which is filed of public record.

There are many false and misleading claims made in an attempt to sell living trusts. Be careful anytime you are told that "Everyone should have a living trust," or "Probate is expensive and time-consuming." Those statements are false. For many people, a living trust is a good option, but for most people in Texas, it is not. People who have estates that are large enough to incur an estate tax should definitely consider a living trust as an option. The important thing to remember is that you should consult with an attorney who is interested in your unique situation and in doing what is best for you, not merely someone who is selling living trusts.