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ADVANTAGES AND DISADVANTAGES OF A WILL AND A REVOCABLE LIVING TRUST FROM AN ELDER LAW ATTORNEY’S PERSPECTIVE

There is much debate among Texas attorneys as to whether it is better to have a Last Will and Testament or a Revocable Living Trust to transfer assets at death under the terms and conditions you desire. The simple answer is that it depends on the facts, your goals, the type of assets, cost concerns, potential disability issues (of both you and your beneficiaries), if real estate is owned in more than one state, etc. In fact, sometimes, it is best to have neither! There are numerous types of trusts created for a multitude of reasons that are beyond the scope of this article.

Wills

Most are familiar with Wills – the document which dictates how individually owned assets (without beneficiary designations) are to be distributed after death if the Will is determined valid in accordance with state law as determined by the court. This process is known as probate. However, that doesn’t mean that all Wills need to be probated. On the other hand, many are surprised to learn that Wills must be probated to transfer certain assets. For example, if a husband (who has children from a prior marriage) has a Will that states the homestead goes to his surviving spouse, the Will must be probated for the surviving spouse to solely own the homestead. Otherwise, the husband’s children would have an ownership interest under the laws of intestacy.

Revocable Living Trust

Although there are dozens of types of trusts, most people think of a Revocable Living Trust when they hear the term “trust”. A Revocable Living Trust is a trust that can be amended, modified, or revoked during the life of the person establishing the trust, and assets of the grantor should usually be funded (in other words, retitled) into the name of the trust. Some assets (i.e., retirement accounts due to income tax issues) should not be retitled to the name of the trust during the grantor’s life. Since the trust is revocable, the trustee can take assets in and out of the trust as desired. Also, no separate tax return is needed during the life of the grantor (the one who establishes the trust).

Six Advantages of a Will

1.  Less expensive up-front costs.

It is generally less expensive to create a Will than a trust.

2.  If your spouse is your beneficiary and is disabled at the time of your death and your spouse seeks Medicaid to pay for long-term care costs.

Under the long-term care Medicaid rules (which helps for long-term care costs such as nursing home and at-home care), a special needs trust for a surviving spouse can only be established by a Will (not in a Revocable Living Trust). So, if the surviving spouse doesn’t have adequate long-term care insurance or has inadequate income to pay for care, then often planning to preserve resources for the surviving spouse (and beneficiaries) is best through a Will. However, some who plan create a Medicaid Asset Protection Trust (which is different than a Revocable Living Trust).

3.  If you need a guardian for a child of yours who is a minor.

Although other documents can be used to name a guardian for a child of yours who is a minor, often it is best to name a guardian in a Will.

4.  Employee Stock Options.

Sometimes employee stock options can be transferred only by a Will.

5.  Certain PLLC membership interests cannot be owned by a trust.

The ownership (membership) interests of certain professional limited liability corporations cannot be owned by a trust. For example, a professional limited liability corporation owned by a certified public accountant cannot be owned by a Revocable Living Trust since only certified public accountants can be members of such a PLLC for accountants.

6.  Texas has a simplified probate process.

If the Will was properly prepared and the original Will can be located and if there is no expectation of a contest, then generally the probate process is not difficult – you just have to follow all the laws.

Four Disadvantages of a Will

1.  Probate – delay, costs, and must follow the laws.

Although probate is generally simple in Texas, you must follow the laws. So, for example, if the original Will was lost, the court will presume it was destroyed and additional proof if needed. Another example is if the notary fails to fill in one of the names of the witnesses, then a witness must testify to prove the validity of the Will. Some other examples of when it is better to have a trust due to the laws are outlined in the advantages of a Revocable Living Trust below. Any failure to follow Texas law will result in a delay in the distribution of assets and result in additional costs to the estate (not to mention the normal costs of probate). Even if there is a problem with the Will, an estate can generally be distributed quicker through a Revocable Living Trust since there is no delay by having to follow state probate laws.

2.  Lack of privacy.

A Will is a public record once you apply for probate. An inventory (filed with the court) of the assets belonging to the estate of the deceased is also a public record.

3.  Will is not effective until death.

Since a Will is not effective until after you pass and the court approves the validity of the Will, it becomes incumbent for you to have a financial power of attorney as part of your estate plan for an agent to handle your assets, contracts, etc. particularly if you become disabled. The problem is sometimes financial powers of attorney are not recognized and the expensive guardianship process is then needed.

4.  Easier to contest.

Although trusts can be contested as well, it is generally easier to contest a Will.

Seven Advantages of a Revocable Living Trust

1.  Probate avoidance.

You make your own rules as opposed to having to go in accordance with specific laws required by the Texas Estates Code.

2.  Real estate owned in more than one state.

If you own property in another state and the property is to pass by your Will, then you may have to follow the ancillary probate laws in the state other than Texas where you own real estate resulting in additional legal fees, court costs, and delay.

3.  If you own a business.

Since there is a period of time before a Will is probated and there is a need for a business to continue without delay, a Revocable Living Trust is generally recommended to pass a business.

4.  If you have many beneficiaries.

Under the Texas Estates Code, beneficiaries must be notified and provided with a copy of the Will. Proof of notification must be provided to the court. So, if there are many beneficiaries, it is often best to have a Revocable Living Trust due to additional costs and delays.

5.  Quicker and easier.

Since the probate process can be avoided, distributions can often be made quicker assuming the Revocable Living Trust is properly funded.

6.  Privacy.

These days where many hackers are trying to get private information, many prefer the privacy that a Revocable Living Trust provides (a Will is a matter of public record).

7.  Disability.

A Revocable Living Trust is effective immediately (unlike a Will which becomes effective at death). As a result, guardianship concerning the assets in the trust is often avoided (instead of relying on a power of attorney that may or may not be recognized or that may lack sufficient authority).

Five Disadvantages of a Revocable Living Trust

1.  Funding.

The biggest mistake made is for the one who creates the trust in failing to re-title assets into the name of the trust. This is a deterrent to many who have numerous accounts as this may take time. Also, some financial institutions require new accounts to be established. If you have automatic bill payments then those payments may need to come from the new account (although there are ways to get around this). Also, sometimes new assets are acquired later and some forget to re-title such assets causing the necessity for probate.

2.  Cost.

Due to the funding mentioned above (ranging from deeds to opening new accounts), it is more costly to establish a trust than a Will. However, if properly funded or with beneficiary designations, the cost of probate should be avoided.

3.  Public benefits planning.

Although Revocable Living Trusts are often prepared for the possibility of disability of the person establishing the trust, this is often counter-productive if planning for Medicaid. For example, a homestead is generally a non-countable resource if you apply for long-term care Medicaid. However, if the homestead is deeded into a Revocable Living Trust, it counts as a resource under Texas Medicaid laws. Also, if you have a joint Revocable Living Trust (often married couples establish a joint Revocable Living Trust in Texas since it is a community property state), this could create a problem for retention of Medicaid of the disabled spouse since the countable resources of the disabled spouse must be less than $2,000 within one year after Medicaid eligibility is obtained. It is likely the joint revocable trust would have resources greater than $2,000 after a year. Also, you can’t create a supplemental needs trust for a spouse (as mentioned in No. 2 of “Advantages of a Will”).

4.  Employee stock options and certain PLLC membership interests cannot be transferred into a trust.

See No. 4 and 5 of “Advantages of a Will”, above.

5.  Refinancing loan on a home.

Since trusts never die or become disabled, lenders generally will not lend funds to a trust. So, if you want to refinance your home, generally the loan should be in your individual name (although you could be able to deed the property subject to the loan back into the Revocable Living Trust pursuant to federal law).

Although there are other items to consider in determining whether a Will or Revocable Living Trust is better for you, the issues mentioned above are some of the most commonly considered.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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