There are many types of trusts: revocable and irrevocable; living trust and testamentary trusts; special needs trusts; and the list goes on and on. This blog is not meant to be an exhaustive analysis of trusts. Rather, it is intended for the individual with real estate holdings in addition to his or her personal residence – think second home, rental properties, timber properties, and oil and gas properties. Although the blog is intended for everyone, those who reside in Texas may want to pay special attention.
THE TRADITIONAL REASONS FOR A TRUST
In law school, you learn that there are three traditional reasons for a trust:
1. To avoid federal estate taxes (e.g. the “death” tax).
2. To provide for a special needs family member (e.g. a child with a mental disability).
3. To avoid probate.
As of now, a married couple must have an estate in excess of $10,000,000 before being too concerned about federal estate taxes. Of course, that could change but not before sometime well into 2021. You may want to wait until after the election results and the work of the next Congress before rushing into an expensive trust planning session in “anticipation” of a law change.
Obviously, a special needs trust is essential for those disabled family members. But remember, there is a difference between a disabled family member and a family member who you think will do something you would not like. Think twice before creating a trust so that a child cannot EVER sell the family farm – remember, circumstances change but forever, is, well, forever.
Probate in Texas is not particularly difficult nor is it particularly expensive. Our legal system, including our real estate laws, ownership laws, and descent and distribution laws, lend themselves to a probate system to clearly place ownership of assets into the hands of the next generation. Remember always, if you create a trust, a legal fee is incurred. If you probate a will, a legal fee is incurred. The economic effect may well be a “wash.” And heaven forbid, if a trust is created and then a probate is subsequently needed, two sets of legal fees are incurred – and that is not a “wash.”
SPECIAL CONSIDERATIONS FOR THE REAL ESTATE OWNER
You, the real estate owner, should consider, carefully, the following when considering a trust:
1. Paying expenses associated with the real estate &
2. How will the trustee be compensated &
3. Actually transferring real estate into the trust.
Most pieces of real estate incur regular expenses:
· Repairs and maintenance to rental properties
· Planting crops
· Feeding and caring for Livestock
· Management Fees
· Preparing Tax Returns
– The list goes on and on.
And sometimes the real estate does not generate cash: the crops do not get sold; the rental property goes unleased; the timber is not ready for harvest; oil and gas wells stop producing. But the expenses continue to accrue, regularly, without regard to the cash income stream. So, where does the trustee get the funds to pay these expenses?
Also, unless you have an “angel” for a trustee, it is likely that the trustee will want to be paid for his or her work. Certainly, institutional trustees (banks) will. Even family members tire of working for other family members without pay. Working for free, involuntarily, is called slavery – and that is against the law. While I may love my sister, will my son love his aunt? Will my grandchildren love their great-aunt? Enough is enough!
And from what asset do these trustee fees get paid? Well, rental properties generate income unless they are unleased; farms generate revenues from crop sales except when there are no crops or no sales; timber generates money every 15 years or so; oil and gas wells produce – and then they do not produce.
Last, creating a trust instrument does not mean that your real estate is now owned by the trust. You must then execute a deed or deeds for each piece of real estate that conveys the real estate to the trustee, such as to “Jack Wilhelm, as trustee of the Jack Wilhelm Family Trust created by document dated xxxx, xx, 2020.” If you created a trust, did you do that? Did you do that for every piece of real estate you own? If not, your heirs will be probating your will, which costs something, and all of the trust agreement work, which cost something, will not avoid this cost.
As a parting thought, a probate will be required in each state where you own real estate. Accordingly, to avoid multiple probates, it may make sense to convey real estate in states where you do not live, into a trust or, perhaps even better, a limited liability company.
THE LIABILITY ISSUE
Last, unrelated to estate planning, if you own real estate, you should evaluate the likelihood of a personal liability. For instance, if you lease rural land for hunting, what is your liability if your hunter is injured, or, even worse, injures someone else? Aside from a good general liability policy, a limited liability company can protect you and your other assets from liability. Something else to consider.
Our firm does not offer “cookie-cutter” solutions. We tailor to each individual’s special needs. This can be especially important where real estate holdings are involved, and outside properties are part of your asset portfolio. Whatever you do, do not go with a one size fits all law firm – get a specialized service.
by Jack M. Wilhelm
Edward Wilhelm and Jack Wilhelm provide tremendously high value legal assistance to a large number of very desirable clients.
THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, TX 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net
DISCLAIMER: The information on this site is not intended to and does not offer legal advice, legal recommendations, or legal representation on any matter. You need to consult an attorney in person for legal advice regarding your individual situation.