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Dear Clients:

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 disclaimers.

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 disaster.

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 expect?
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 stepped-up basis?
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 trust's name?
20. What if I do not acquire a new IRS account number for the trust?
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 document?
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 for Medicaid?
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 exclusion)?
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 exemptions?
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 done.
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 result?
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 same?
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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