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I am sending this memorandum to you because so many of my clients
have asked me about whether or not they should covey their assets
into a Inter-vivos Trust (living trust, grantor trust,
revocable trust or irrevocable trust).
The below is the memorandum that I have started handing out to my
clients who have asked that question. In the past, only one of my
clients had insisted upon creation of such a trust; whereby the
greatest majority have deemed they were not necessary, too
expensive, too complex or that they could accomplish the same
results by a carefully prepared will, with testamentary trust and
proper estate tax planning, including the later use of qualified
Only in one instance involving one of my clients would a living
trust have been the only vehicle that would probably have
benefitted the client's family. The husband's stock transfer agent
refused to honor a Durable Power of Attorney and the husband had
Alzheimer's disease and could not sign the stock transfer
documents. That was before the changes by the Model Durable Power
of Attorney Act. Since then, the same stock transfer agents are
now recognizing the current durable powers. Also, some title
companies and banks are doing so.
For most modest estates, the probate costs, including Probate
Court filing fees, fees for Letters Testamentary, and publication
costs do not exceed $600.00 to $1,000.00. However, estates
requiring appraisals and complicated tax matters, and handling of
the partition of the estate's assets, do cost more because more
legal work is involved.
The time to complete probate proceedings normally take 60 days;
but, can possibly be performed within 30 days total (my shortest
time for taking in data, preparing application to probate, have
hearing, file publication notices and final inventory was 27
days). Since most estates are not formally closed, there is no
need to prolong the probate past the filing of said inventory. If
it takes longer than 90 days to complete the probate, then someone
is dragging their feet (clients or attorneys). This does not imply
that complex estates can possibly be closed in such a short period
of time, especially if federal estate tax returns need to be
filed, and there is a need to keep the probate open until hearing
from the IRS. Audits will take cause further delays.
My advice in all instances will be for you to have a properly
drafted Last Will and Testament for probating of that part of the
estate that may not be included in the trust that you create,
whether left out for ad valorem tax reasons, tax reasons, simple
neglect to convey over to the trust, or otherwise. Without a Will,
the Administration expenses can be enormous. And do not think for
a second that the Court appointed Administrator will not ask the
court to order the Trustee to convey to the Estate such assets as
will be necessary to pay for such costs, including the creditors
of the estate. With a Will, you can name your Executor; and
without one, the Court can name anyone - there is a list of
relatives that normally have first choice, but the court could
find their interests to be adverse to that of the estate or could
otherwise disqualify those heirs.
There has been a lot of discussion the last couple of years
concerning the need to create living trusts in lieu of having
Wills. There are numerous Trust Kits for do-it-yourselfers to
use to save attorney fees. There are a lot of charlatans out there
promising that their kit is the best and will fit the requirements
of every state. There are non-lawyers giving legal advice as to
which type of trusts to set up and how to bypass probate
proceedings. There are even computer programs for creating your
own trust. Wow!
There will be a lot of happy plaintiffs/malpractice attorneys
involved in filing negligent and malpractice lawsuits against
those non-lawyers for the heirs and/or clients who were seriously
misled and sold a worthless bill of goods. Someone will be
seriously damaged by such activity. Be sure that you obtain the
person's full name and address who sells the goods to you,
including the publisher of the book or computer program. Keep all
of these documents in a safe place so that your heirs will know
who to sue later in the event someone is damaged.
If anyone is to consider living trusts (not a living will -
which is a directive to physician to pull the life-support
system if one is brain dead), they must seek competent legal
advice and pay well for that advice. Do not use store bought forms
for do-it-yourself brain surgery and do not use store bought forms
for do-it-yourself living trusts. The results of either could be a
Do not read me wrong, as there is certainly a place and need for
carefully drawn living trusts (grantor's trusts), whether
revocable and/or irrevocable. There are very much a need for
testamentary trusts and carefully drafted Wills.
The questions most Texas residents (and probably most non-Texans)
should ask of this person selling you a kit or form are:
1. What is that person's qualifications, experience and knowledge
of Texas laws regarding trusts, wills, exemptions, ad valorem tax,
income tax, estate taxes and probate? Is that person bonded or
have malpractice insurance?
2. What are the expenses to be expected in the drafting of the
trust agreement; and what are the comparable expenses of a Texas
probate of a properly drawn Will providing for Independent
Executorship? (NO COURT CONTROL AFTER THE FILING OF AN INVENTORY
AND OATH WHY DO SOME EXPERTS CLAIM THE COURT MUST APPROVE A
TESTAMENTARY TRUST OR THE APPOINTMENT OF A TESTAMENTARY TRUSTEE,
WHEN THAT IS AN ABSOLUTE LIE? Why do they need to lie to sell a
product or a service?)
3. What are the expenses to be expected in the yearly operation
of the trusts?
4. What additional tax preparation expenses should I or the trust
5. If the client is the settlor/trustor, and is the trustee, and
is the sole beneficiary of the trust, can the trust be nullified
as being an illusory trust, whereby the estates are declared
merged into one?
6. What effect will the creation of the trust have on the Texas
homestead exemptions and how are you safeguarded that this
valuable exemption has not been nullified?
7. Can the trust be declared void as being in defraud of the
trustor's or trustee's creditors?
8. Can the trust be set aside by a guardianship proceeding
involving the trustor, trustee or beneficiary? If a creditor files
for guardianship, what protection do I have pursuant to Section
112.035, Texas Property Code?
9. Can the trust be set aside by a bankruptcy proceeding
regarding the trustor, trustee, or beneficiary?
10. Will the trustor/grantor lose other exemptions that he/she
would have in the cars, furniture, funeral policies, certain life
insurance, and other exemptions?
11. Should the trustee be bonded, and who will sell the bond and
at what cost?
12. Does the trust violate the Laws Against Perpetuities?
13. Will my heirs or beneficiaries get a stepped-up basis of the
trust assets upon my death as per Section 1014, I.R.C.? How much
tax loss will that be to my beneficiaries if they lose such a
14. Will there be a gift tax to pay by the creation of the trust?
15. Is it still possible that I should have a Last Will and
Testament and that my heirs should see to its probate?
16. How often do I have to convey subsequently acquired assets to
the trust in order to make them trust assets?
17. What if I do not execute and immediately record deeds and
bills of sale of my assets over into the trust?
18. What if I do not execute new car/boat/travel trailer titles
into the trustee's name?
19. What if I do not change all of my stock certificates, bank
account, bonds, certificates of deposits, etc., over into the
20. What if I do not acquire a new IRS account number for the
21. What will happen to Subchapter S corporation stock that I own
at the time of creation of this trust or at the time of my death?
22. Will my estate still have to file a Federal Estate Tax return
upon my death and will the trust assets be included in said gross
estate? If so, how has this trust saved my estate any taxes that a
testamentary trust could not have also saved?
23. What happens if the trustees refuse to serve or become
incapacitated or steal from the trust? How much can this cost?
24. Who sets the trustee's fee or salary?
25. Will my banks, stock companies and other businesses deal with
said trust without having been provided a copy of the trust
26. What happens to my property if I do not have a Will and some
of my assets are declared not to be included in my trust? At what
expense can my heirs anticipate if such occurs?
27. Will my trust assets be considered if I attempt to qualify
28. The fact that I will no longer technically own my
homestead, will that fact prevent my qualifying for Medicaid?
29. If the proceeds and income of the trust are subject to my
control, what would prevent a creditor or court appointed guardian
from getting a court order to attach said income?
30. If I conveyed all of my assets into the trust, will that in
fact make me insolvent?
31. Will the trust be so created that I will not lose my life-
time income tax exclusion of $125,000.00 if I elect to sell my
homestead? What about IRS Private Letter Ruling 8549046 and
8313025 (incompetence of settlor could cause loss of said
32. Will such conveyance of a qualified IRA or other vested
retirement plan into the trust cause early penalties?
33. Can qualified pension plans be so converted into the trust?
If not, what will happen to the proceeds?
34. How can the trust make annual gifts to my children and be
entitled to the annual exclusion of $10,000.00? Will any of those
gifts be included in my federal estate tax?
35. Will I lose my homestead and/or old age exemption for ad
valorem taxes? How can it be done so that I do not lose such
36. If I make it an irrevocable trust and name a third party as
trustee, will I be able to make any future decisions as to the
trust income or disbursal to me?
37. As to public records, almost all of your prior dealings
regarding automobiles, credit cards, and property ownership are
public documents. How many probate heirs do you know have been
approached by someone who had examined the spouse's probate
records? Will not the conveyance of all of your assets that
require recordation or transfer of title involve public records?
38. What if I forget to follow the details of managing the
trust's assets and merge the same with my other non-trust assets?
Or, forget to file proper tax returns?
39. Is it true that if my estate's executor accumulated income of
the estate, it would be taxed to the estate at the lower tax rate;
but if my trust accumulates income, the payee would be subject to
a throwback tax at payee's taxable rate?
40. Would the creation of the trust and the conveyance of
mortgaged property into the trust cause an acceleration of the
note under its due on resale clause?
41. Will the transfer of an installment obligation due and
payable to me over into the trust cause me to have to accelerate
recognition of the deferred installment sales gain?
42. My heirs under a Will would receive the same holding period
for determining a long term versus short time gain; however, will
the beneficiaries under a trust be so lucky?
43. Can a trust use a fiscal year like an estate can?
44. Will the trust's annual tax exclusion equal or exceed the
annual exclusion of an estate?
45. Will the trust have to make quarterly estimates of income tax
liability, whereby an estate and/or testamentary trust does not
for the first two years following death?
46. What are the benefits of creating a unfunded living trust now
and then funding it when a disability occurs? Ask how this can be
47. What can be accomplished with a current Durable Power of
Attorney? Limited power of attorney? These can, of course, be
terminated by the filing of guardianship proceedings.
48. If I convey all my assets into the trust and then die, who
decides when and if my estate should file federal estate tax
returns, qualified disclaimers, selection of alternate valuation
date, inheritance tax returns, having appraisals made of the
property, including appraisals of trust assets? Will new
appraisals be necessary? What if the Trustee does not know to do
this or fails to do it? What is the consequence? What happens to
the unlimited marital deduction? What happens to the qualified
elections for valuation of farm and agricultural properties and
for valuation of family businesses?
49. Delays in estate administration do not disqualify the
surviving spouse from claiming the unlimited marital deduction;
but, will delays in the trust's administration have the same
50. If I have minor children, can I name a guardian/conservator
for the child without having a Will? Will a Trust vehicle do the
51. If my estate consists merely of my homestead and exempt
assets, will it be cheaper to file Small Estate proceedings
and/or affidavits than it would be to create a trust?
Unless you get satisfactory responses to all of the above
questions, it may be wise for you to hold off creating such a
trust until you do in fact receive competent advice from tax
advisers, accountants and board certified estate tax planners.
During these times, no one wants to throw money away needlessly.
Yours very truly,
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