WHAT IS A REVOCABLE TRUST?
A revocable trust is a legal document in which you transfer your property to another party (the Trustee) who holds and manages it for the benefit of yet another party (the Beneficiary). A revocable trust becomes effective the moment it is signed. Consider the following analogy. A revocable trust can be compared to a suitcase. In it, you place all of your assets. You carry the suitcase and manage its contents during your life (assuming you are the trustee of your trust) and upon your death, the suitcase and all of its contents are automatically delivered to your loved ones, without court proceedings. Having obtained and filled the suitcase, the analogy continues, you may specify who carries it, including who carries it when you become incompetent or when you die and who receives the contents upon your death, assuming that you want the contents distributed then. The terms of the trust specify what you intend.
WHAT ARE THE BENEFITS OF A REVOCABLE TRUST? There are many good reasons to form a revocable trust:
- Avoiding probate. By creating a trust and transferring all your assets into it, you can avoid the process of probating a will at the time of your death. (This goal becomes particularly important if you own properties in more than one state. With a trust, you can avoid probating the will in all the states where you own property).
- Privacy. A trust allows you to maintain privacy about your beneficiaries and the assets in your estate. The creation and funding of a trust are private matters and not matters of public record, unlike wills and probate proceedings.
- Trustees. You may want the assistance of another person or institution to manage your assets now or in the future, when you are less able to do so yourself. By the same token, you may want this management assistance for some or all of your loved ones after your death. In your trust, you will be able to set out provisions in which you appoint specific agents to serve in these positions.
- Avoiding will contest. If you have reason to believe that there might be squabbling over your estate, a trust is a strong statement of your intentions, which is harder for contestants to attack. IF I CREATE A TRUST, DO I STILL NEED A WILL? When we prepare your revocable trust, we will also prepare a simple will for you as an additional safeguard. If you die without all your property in the trust, this will can then be probated and “pour over” your probate assets into your trust, hence the name “pour-over” will.
If you have a living trust, you must remember that all of your assets should be owned by the Trust rather than by you personally. This is not a difficult process but it requires attention to the details. Are you in the habit of that? Living trusts are popular because it allows your heirs to avoid probate.
However, probate in Texas is simple and inexpensive. In Texas, there is a relatively easy procedure called an “independent administration” if your will has the proper language. An independent administration can often be completed within three months if no estate tax return needs to be filed.
If you choose to have a living trust, it’s all in the details! When you open a bank account, you must explain the trust to the bank and make sure the trust is the owner of the account. If you receive property by purchase or inheritance, you must purchase it in the name of the Trust or transfer it to the Trust immediately.
What if you miss the details? Because the benefits of a living trust (such as probate avoidance) apply only to the assets in the trust, if you miss the details your estate will have to go through probate. We have had clients whose relatives had a living trust but an asset was not in the living trust. Therefore, the will had to be probated and the living trust was all for naught.
Remember, if just one bank account is in your name alone instead of in the trust, then your estate will have to go through probate and incur all the costs of probate, on top of what you have paid to have a living trust.
A Lady Bird Deed is an enhanced life estate deed which is used to convey property to heirs and avoid probate. Some interesting features of the Lady Bird Deed include:
- The grantor retains homestead, creditor and tax exemptions
- The Deed protects the grantor’s home from Medicaid claims during the grantor’s lifetime
- The property passes to the recipient outside of probate without Medicaid claims and liens upon the death of the grantor
- The grantor retains the right to sell or otherwise dispose of the property without the consent of the beneficiaries
You will not lose your Texas property tax homestead exemption; however, a home placed in a revocable or living trust (or similar type trust) loses the exclusion as a homestead and becomes a countable resource for the purposes of medicaid.
Below are tax implications of the Lady Bird Deed:
**No Federal Gift Taxes
Unlike other deeds, a Lady Bird Deed does not transfer any incidents of ownership in the property. Because the grantor does not actually transfer ownership of the property by executing a Lady Bird Deed, no federal gift tax issues arise.
**No Lost Step-Up in Basis for Capital Gain Taxes
**No Lost Texas Property Tax Exemptions
Lady Bird Deeds do not prevent the grantor from occupying the real property. Therefore, provided the property is the grantor’s homestead, he or she can continue to claim the homestead exemption, and over 65 or disabled homeowner exemptions permitted under Texas Tax Code $11.13
Below are potential drawbacks of the Lady Bird Deed:
**Law Could Change
Lady Bird Deeds are not without potential shortcomings. The law is subject to change. There is no guarantee that federal or state law will always permit the use of Lady Bird Deeds or that actions taken prior to such a change in law will be grandfathered. A recent example on point is HHSC’s December 2009 revised MEPD policy $F-3210 which states: “A home placed in a revocable or living trust (or similar type trust) loses the exclusion as a homestead and becomes a countable resource . . . .”
In the vast majority of cases, when real property is purchased, sold or mortgaged title insurance is purchased to provide protection against defects in title. While there are approximately eighteen title companies authorized to sell title insurance in Texas, they each take a different approach to the risks they are willing to insure against. Because there is no uniformity in title coverage between insurers, holders of Lady Bird Deeds may run into obstacles when trying to obtain title insurance for the purpose of selling or mortgaging the property.
There are several presumptions within Texas marital property law that are effective unless the spouses alter them through the language of a property agreement. They are:
1. In the event of a spouse’s death, the probate court must presume that all property in existence (without regard to what name is on the title for the item) is community property and each spouse owns an undivided 50% interest in it.
2. In the event of a divorce, the divorce court must presume that all property in existence (without regard to what name may be on the title) is community property and the court has authority to divide it in a manner that the judge believes if fair.
3. A reimbursement claim is to be paid if there has been a reduction in debt or payment for improvements from one estate (separate or community) that benefited another estate (separate or community).
4. The income generated by a separate property asset is community property.
5. The earnings of the parties during the marriage are community property.
The application of those rules may not always meet the objectives of the parties and, indeed, may not always be fair. Therefore, they are subject to modification through the terms of pre-nuptial or marital property agreements.
At 26 years old, Terri Schiavo was found unconscious on the floor. When she arrived at the hospital, she was put on a ventilator to keep her breathing and was in a coma for more than two months.
When she emerged, she was unable to speak. She had suffered severe brain damage because her brain was deprived of oxygen. Multiple doctors diagnosed her as being in a persistent vegetative state.
What followed was a family battle between husband and family. Terri’s family did not want to take her off the feeding tube and her husband who the court had appointed legal guardian contended that she did not want to be kept alive using artificial means. Ultimately, this fight followed because no one truly knew what Terri’s wishes would have been. On March 18, 2005, after an intense legal battle between husband and family, her feeding tube was removed. This was more than 15 years after her husband found her unresponsive and without a pulse in their home.
Terri did not have a living will or directive to physician. She did not have a legal document that stipulates one’s wishes for medical care should circumstances render a person unable to provide consent. A Texas Directive to Physicians allows you to direct your physicians as to how you want your physicians to use artificial methods to extend your life in the event you are diagnosed with a terminal or irreversible condition. It lets your family and doctors know your wishes.
Five Estate Planning Documents Every Adult in Texas Needs
- A Texas Last Will and Testament determines how your property is to be distributed and to whom you want to receive it. A Will can also be used to create a Trust and name an executor and trustee. In addition, it is used to appoint a guardian to care for your minor children. Without a Will, your assets will be distributed according to a statutory formula, which may conflict with how you would have liked for your assets to be distributed. If you do not appoint a guardian for your minor children, a judge who doesn’t know you or your family may have to make that decision for you.
- Texas Durable Power of Attorney: allows you to appoint a trusted family member or friend as an agent to manage your finances if you are no longer capable of managing them yourself due to temporarily or permanently incapacitated.
- Texas Medical Power of Attorney: allows you to appoint an agent to make medical decisions for you in the event you become unconscious or mentally incapable of making those decisions for yourself.
- HIPAA Authorization: allows you to name an individual who can have access to your medical information so that doctor or health insurance company have no reservations about sharing your protected medical information with them.
- Texas Directive to Physicians: allows you to direct your physicians as to how you want your physicians to use artificial methods to extend your life in the event you are diagnosed with a terminal or irreversible condition.