Estate planning is about matching intentions to what is permissible under law. It is a responsibility of adults to manage their affairs, and planning ensures that they are the ones making the decisions on matters of their possessions and property, and not a court. Planning can be as simple as a will or as complex as a multi-trust structure, but there is a huge mistake that too many estate planning attorneys in Texas make.
While a will is a legally necessary instrument to be included in an estate plan, Texans with any amount of appreciable assets would likely benefit from a revocable living trust (RLT). In most cases, the will should not be considered the minimum, but the RLT. A revocable living trust allows assets inside of the trust to pass to beneficiaries without the need for probate. The convenience and streamlining of this inheritance process is the primary benefit of this structure; not going through probate is an additional benefit.
The mistake commonly made in Texas estate plans is that an RLT is drafted and included in a client’s estate plan, but no assets are ever moved into the trust. Instead, the plan calls for assets to be probated and then moved into the trust.
This does save some friction during the grantor’s lifetime. Despite being an extremely common type of trust, many banks and financial institutions struggle to understand the nuance and differentiation between a revocable trust and an irrevocable trust. For federal income tax purposes, a typical grantor RLT is generally disregarded during the grantor’s lifetime because the grantor retains control and the ability to modify or revoke the trust. In practical terms, the grantor continues managing the property much as before. That does not mean every financial institution treats trust ownership as administratively identical, and opening accounts or completing certain transactions can become more cumbersome when an institution is unfamiliar with trust ownership.
But avoiding some paperwork during life can create considerably more paperwork at death.
A revocable living trust only controls the assets that are actually owned by it or otherwise pass to it outside probate. If the grantor’s home, financial accounts, business interests, and other probate assets remain individually owned, the existence of a carefully drafted trust does not make those assets nonprobate property. The family must still open probate, establish the will, appoint the executor when administration is required, and move the assets through the estate before they ultimately reach the trust.
At that point, one of the major advantages of using an RLT has been surrendered.
The will accompanying an RLT is often a pour-over will, which acts as a backstop for property that was not transferred to the trust during life. That is an important function, but the backstop should not be the primary plan. Leaving the trust unfunded means intentionally relying upon probate to accomplish the transfer that could have been completed while the grantor was alive.
Texas does have a comparatively workable probate system. Independent administration, muniment of title, and other features can make probate here less burdensome than it is in some states. Perhaps that helps explain why unfunded RLT planning has become so common. But a relatively efficient court process is still a court process. It requires filings, deadlines, judicial supervision, legal work, and time before assets can be administered and transferred. It can also become more complicated when a client owns property in another state, potentially introducing ancillary probate into an estate plan that could have avoided probate administration altogether.
Funding also becomes more important when incapacity is considered. A properly funded RLT is not merely a death-planning instrument. If the grantor becomes unable to manage financial affairs, a successor trustee can generally step into the existing structure and manage trust property according to the terms the grantor established. Assets sitting outside the trust may instead depend upon powers of attorney or, if those arrangements fail, court involvement.
None of this means every asset should indiscriminately be retitled into a revocable trust. Retirement accounts, assets with beneficiary designations, certain business interests, vehicles, and other property require individual analysis. Good trust funding is coordinated planning, not simply changing the name on every account.
That coordination is why a will and funded revocable living trust should be understood as the starting point for most clients with even a modest level of appreciable assets. Drafting the trust is only the first part of the plan. The ownership of the assets has to match the estate plan.
An unfunded RLT may describe exactly what should happen to a family’s wealth. The problem is that the family may still have to go through probate before the trust gets the opportunity to actually do it.
