Estate Planning RLT vs. Testamentary (Texas)

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greenhorn401
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Estate Planning RLT vs. Testamentary (Texas)

Post by greenhorn401 » Mon Feb 19, 2018 2:08 am

So my wife and I started down the estate planning path, and the lawyer we spoke to recommended a trust based estate planning. What he suggested was to set up a revocable living trust, and upon our death, the RLT will dissolve and spin up a subtrust for our only son (minor). We know we ultimately want a trust because we want to control how the estate is distributed and do not want him to inherit everything outright at 18. However, cost aside, we are not sure the best path to get there.

Our estate is pretty simple; we have one house, bank accounts, taxable investment accounts, 401K and Roth IRA accounts. I also have life insurance. Since we can desiginate a beneficary and bypass probate with the majority of our assets, should I just get a will w/ testamentary trust and call it a day? I am struggling on whether I need the complexity/hassle of an RLT.

Without an RLT, I get that if I or my DW passes, the surviving person would have to go through probate to claim the other half of the house, and when we both pass, the house will go through probate before passing on to my son. All the other assets will skip probate, since I would have already named the testamentary trust as a secondary beneficiary (with my wife as primary).

Am I missing anything?

Also, for any Bogleheads that have done a Testamentary trust, how comprehensive was the verbiage? My understanding is that things like spendthrift trusts are nothing more than just specific verbiage written into a trust, likewise for IRA trust. As long as the verbiage I need is written into the will under the testmenatary trust I should be fine?

afan
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by afan » Mon Feb 19, 2018 9:21 am

Assuming you hold the house as joint tenants or tenants by the entirety then the house would not have to go through probate at the first death.

The RLT has very little cost or complexity associated with it. We set them up ages ago and 99.9999% of the time we never notice them. They have no effects on tax returns. All it required was filling out a form for each account that was moving from individual accounts to a trust account. That was dead simple and only done once.

If the goals you outlined are really the only considerations then the RLT will have little additional value. It will simplify life for whoever has to settle the estates. By establishing and funding your living trusts while you are alive and healthy you take this off the plate of someone in the future. For me this is an important issue. I want to minimize the amount of work my spouse would have to do on my death and minimize the work our executor, close relative, would have to do at the second death. Never put off to tomorrow what you can do today.

The RLT also makes life much easier if you need someone to take over and manage your affairs during your life. Relying on powers of attorney, we found when trying to help someone, can lead to a series of frustrations as financial institutions refuse to honor valid POAs. Things that were in trust were simple. The only way we were able to deal with things that were held individually was having the person transfer those assets into the trust. If that had not been possible we would have had to hire an attorney to deal with each company and its refusal to accept the POA. One at a time, with the meeting running.

We did not price getting our estate planning with only testamentary trusts. According to Bsteiner, who is an estate planning attorney, the cost with RLT or only testamentary trusts should be the same. All the same provisions would appear, in one case they would be in the RLT documents, in the other case in the wills. The time the attorney spends collecting information, explaining options to the client and drafting documents would be the same.

For me, there were good reasons to to do an RLT and no reason not to. Do it now or leave it to someone else to do it later.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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onthecusp
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by onthecusp » Mon Feb 19, 2018 9:54 am

My parents had a RLT set up with most assets in it. As co-executor it made things much easier and pretty well eliminated all the questions we might have had over probate etc. As paper work goes, the trust was a few more pages than the associated wills, real estate and retirement savings were all moved "into the trust". As far as taxes were concerned, all the usual rules applied as per each asset. Real estate came through to us on a stepped up basis. After tax accounts were not taxed. IRA distributions were taxed, though we might have been able to roll that over to individual IRAs for each sibling, none were interested at the time.

greenhorn401
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by greenhorn401 » Mon Feb 19, 2018 10:17 am

Thanks for the responses. The advantages of RLT in minimizing paperwork and headache for the executor were definitely under consideration on which path we would ultimately choose.

In our case, we do hold the house as joint tenants (DW and I both show up on the title), so I am not sure why the laywer mentioned that upon first death, the estate of the deceased will have to go through probate. If I understood the lawyer correctly, I have to figure out what to do with "my half" of the house upon death and it's not automtic even in joint tenants that DW gets it.

There is a cost difference between Will (w/ testamentary) vs. RLT estate planning package (package includes medical/fiancial PoA etc). The RLT package includes taking care of re-titling the house deeed and all associated paperwork. It's about $2,800 vs. $3,850.

As a side note, the laywer I spoke to does not have a designation from Texas Board of Legal Specialization in estate planning. Not sure how much weight this designation carries in the field of law.

For any Bogleheads that have dealth with RLT, do taxable accounts and tax advantaged accounts get co-mingled under one trust to be passed on, or do they go to two separate trusts, one to hold each type of asset? Wondering about tax implication specifically with 401K and RMD.

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Eric
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by Eric » Mon Feb 19, 2018 10:59 am

A few thoughts:

1. It is rare in Texas for homes to be held as joint tenants with right of survivorship. Unlike in some other states, that is *not* the default and merely having both names on the deed is *not* sufficient to create a right of survivorship. Historically it wasn't even possible to title a home in Texas with right of survivorship. (That violated the state constitution!) The constitution was amended a while back to allow this but title companies still disfavor this type of homeownership.

2. Probate in Texas is typically an all-or-nothing process; it's not much easier to probate a small estate with one asset than a large estate with many. (Most attorneys here charge on either an hourly or flat-fee basis, and it takes the same amount of time to attend a probate hearing either way. Some ancillary work costs more for larger estate, but most of that ancillary work -- preparing tax returns, disposing of assets, etc. -- must also be done with a revocable trust.) We have a small-estate procedure, but it is not available for people who die with a will (even a "pourover" will, which you should have even if you choose to use a revocable trust). In my experience, people almost always leave something out of the revocable trust (or acquire property later that they forget to put in the trust), requiring a probate anyway. And even if you are extremely diligent about transferring assets to the trust, you may die in a way that requires probate. For example, if you die in an auto accident, or as a result of medical malpractice, your estate will have a claim that is not part of the trust and requires an executor to handle. In those cases, people with revocable trusts end up paying twice: Once for the extra cost of a revocable trust to avoid probate, and again for the probate it didn't succeed in avoiding.

3. All that said, there are some benefits to titling property in a revocable trust. If you own property in another state that has more cumbersome probate procedures, having a trust may be useful for avoiding that. If you are concerned about future incapacity, revocable trusts can be helpful for that too. (Third parties are often more willing to respect the authority of a successor trustee under a trust document than they are to accept the authority of an agent acting under a power of attorney.) If you are concerned about people knowing the terms of your estate plan, a will becomes a public document when probated while a trust agreement generally does not. And there may be other factors to consider in particular cases.

Bottom line, there are valid reasons in some cases for either choosing a revocable trust or not. However, I would say that the benefits of revocable trusts in Texas, while real, are overhyped and not as widely applicable as some folks say. I would be wary of anyone who says that everyone needs a revocable trust.

donall
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by donall » Mon Feb 19, 2018 12:29 pm

As a reustee/executor this past year, my advice is to use two separate RLTs. The RLTs can be identical and both should have a guardian, financial trustee, and instructions for the child and when the funds are inherited (just remember that after death the RLT becomes irrevocable). No need for a separate trust to be made if both parents pass away. There should be contingent guardians etc., as changes happen as a child grows up. Also important to have pour-over wills and then the other important documents such as living wills etc. The house should be owned 50% by each trust. If there is concern about bank accounts and life insurance, title them in the trusts so that the funds are not available until the trusts direct disntribution. Advice for the beneficiaries of IRAs and other retirement accounts should be sought to preserve the stretch. Note, I am not an attorney, just a trustee who benefitted from well done documents.

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Eric
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by Eric » Mon Feb 19, 2018 12:38 pm

donall wrote:my advice is to use two separate RLTs. . . . The house should be owned 50% by each trust.
I know that's meant to be helpful, but this is not appropriate advice for most Texans or, I believe, residents of other community property states.

afan
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by afan » Mon Feb 19, 2018 2:30 pm

Eric,

That is an interesting point about the estate having rights to money coming in from legal proceedings after death. It is not obvious to me why the trust could not be the recipient and pursue the cases, but I gather that is Tx law? The estate represents the person after death while the trust is limited to property?

The Texas tradition of spouses holding their home as tenants in common is also interesting. Why is that the case? Is there some advantage in Texas to doing it that way?

I am not a lawyer and obviously not an expert on Texas. I would not have my estate planning done by an attorney who was not an expert in the field. This is a complicated specialized area and it is easy for a less informed lawyer to get it wrong.

If Texas has a system for identifying experts that is great. An alternative is to seek out someone who is a fellow of ACTEC, the American College of Trusts and Estates Counsel.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Iorek
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by Iorek » Mon Feb 19, 2018 2:55 pm

Do you have a mortgage on your residence (and any possibility of refinancing it)? IIRC having property in trust complicates borrowing on it.

In general I think living trusts are overrated but it can be state-specific and it sounds like you are at least doing your homework to make an informed decision.

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Eric
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by Eric » Mon Feb 19, 2018 3:35 pm

afan wrote:That is an interesting point about the estate having rights to money coming in from legal proceedings after death. It is not obvious to me why the trust could not be the recipient and pursue the cases, but I gather that is Tx law? The estate represents the person after death while the trust is limited to property?
That's essentially right. The trust governs only the property that is contributed to it. There's no way (under Texas law, at least) to contribute property you don't have yet. A pourover will can sweep in that property at your death, but once you've probated a pourover will you've done most of the work that would be associated with the probate of any properly drafted will.
afan wrote:The Texas tradition of spouses holding their home as tenants in common is also interesting. Why is that the case? Is there some advantage in Texas to doing it that way?
I think the policy was to keep inheritances in the line of descent. You could see the same bias in our old intestacy statutes. Before 1993, if a married person died without a will, his half of the community property would pass entirely to his kids, rather than to his spouse -- even in a first marriage / nuclear family situation. That was a mess, it meant the widow could end up co-owning property with her minor children.
afan wrote:If Texas has a system for identifying experts that is great. An alternative is to seek out someone who is a fellow of ACTEC, the American College of Trusts and Estates Counsel.
Both the Texas Board of Legal Specialization and ACTEC are excellent resources.

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FIREchief
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by FIREchief » Mon Feb 19, 2018 5:18 pm

Eric wrote:
Mon Feb 19, 2018 10:59 am
For example, if you die in an auto accident, or as a result of medical malpractice, your estate will have a claim that is not part of the trust and requires an executor to handle. In those cases, people with revocable trusts end up paying twice: Once for the extra cost of a revocable trust to avoid probate, and again for the probate it didn't succeed in avoiding.
I get the point here, but we can't be talking about more than 5% of the deaths that occur. Another example is if a decedent had just become the beneficiary of an estate prior to death and the estate assets had not yet been distributed. A person can "encourage" parents, etc. to name the child's RLT as beneficiary of their estate, instead of their child, but this is not necessarily a reliable approach.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Eric
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by Eric » Mon Feb 19, 2018 5:42 pm

FIREchief wrote:
Mon Feb 19, 2018 5:18 pm
Eric wrote:
Mon Feb 19, 2018 10:59 am
For example, if you die in an auto accident, or as a result of medical malpractice, your estate will have a claim that is not part of the trust and requires an executor to handle. In those cases, people with revocable trusts end up paying twice: Once for the extra cost of a revocable trust to avoid probate, and again for the probate it didn't succeed in avoiding.
I get the point here, but we can't be talking about more than 5% of the deaths that occur.
I agree that the vast majority of cases are just people overlooking assets (which happens far more often than you'd expect -- there's always something, and more "somethings" arise as people get older). My point was just that even a hyper-meticulous person who catches everything may still get thrown into probate.

I would add, though, that apart from lawsuits there are smaller claims that arise on a more routine basis. Refunds and such due from third parties, just in the ordinary course of life. Maybe substantial, maybe not, maybe something you can jawbone the third party into paying anyway, maybe not. Probably not worth having a probate for but something to be aware of. It is awfully handy -- awfully convenient -- to have Letters Testamentary available to deal with a deceased person's affairs. Not always necessary and may not be a reason by itself to probate a will, but I think people underestimate how much inconvenience they may incur working around the absence of something official from the court (particularly in a state where revocable trusts are not routinely used), in order to avoid the inconvenience of probate.

afan
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by afan » Mon Feb 19, 2018 6:39 pm

Eric wrote:
Mon Feb 19, 2018 5:42 pm

I would add, though, that apart from lawsuits there are smaller claims that arise on a more routine basis. Refunds and such due from third parties, just in the ordinary course of life. Maybe substantial, maybe not, maybe something you can jawbone the third party into paying anyway, maybe not. Probably not worth having a probate for but something to be aware of. It is awfully handy -- awfully convenient -- to have Letters Testamentary available to deal with a deceased person's affairs. Not always necessary and may not be a reason by itself to probate a will, but I think people underestimate how much inconvenience they may incur working around the absence of something official from the court (particularly in a state where revocable trusts are not routinely used), in order to avoid the inconvenience of probate.
In the one case for which I served as trustee and executor there were a number of such post mortem refunds or benefits. Had I known about them at least most could have been directed to the trust and not to the estate. But the person had forgotten about them, even though I asked when we were trying to get everything into the trust. Unlike the DPOA, which was useless while the person was alive, the letters of administration were treated as golden. The companies essentially saw them as relieving them of all responsibility. If the court says to deal with afan, that was fine with them.

Probate was not particularly painful, but it did involve a meaningful amount of time wasted filing forms, dealing with clerks who kept giving conflicting information, and very long periods of waiting for something to happen. With the RLT, I was able to pay bills (like real estate taxes, utilities and maintenance costs) without delay. Although it did not eliminate the need for probate, it made settling the estate much simpler since I did not have to wait for the process even to start before I could make the payments, make funeral arrangements, retain and pay a lawyer to help with probate and other estate settling issues.

But those were bonuses. The biggest advantage of the RLT was during life.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

fmhealth
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Re: Estate Planning RLT vs. Testamentary (Texas)

Post by fmhealth » Sun Mar 04, 2018 1:29 pm

General inquiry here. Can a trust be funded after the death of the first spouse or must it be accomplished beforehand? Receiving conflicting opinions from lawyers here in AZ.

We have a simple will & an unfunded trust.Thanks so much for your comments.


Be Well,
fmhealth

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