The probate question I get asked the most often is whether a client should use a living trust to avoid probate.  In many states the answer is an unqualified “yes.”  In Texas, the answer is “it depends, but probably not.”

A living trust is a revocable trust to which the client will transfer his or her assets during life.  Since the trust owns the assets and not the client, there are no assets to probate at the client’s death.  Typically, a living trust is more expensive to complete than the drafting of a will, since the client will have to pay for the lawyer to draft conveyance documents to transfer the assets to the trust.  Of course, the cost of probate is avoided when the client dies.

Probate in many states can be a slow and expensive process.  Some states set fees for the court and attorneys, and most states require court approval of most executor actions during the probate process.  Texas is somewhat unique in that it has probate system that is largely independent of court approval.  Typically, the only trip to probate court the executor will make is the hearing to prove up the will and become appointed as the independent executor.   The executor will have to file various notices and prepare an inventory of the estate’s assets, but will not have to seek approval from the judge to proceed with his or her duties.

Historically, one advantage of the living trust, even in Texas, is privacy concerns.  Probate proceedings are public record, and the executor has to prepare an inventory listing the assets of the estate which is filed in the probate proceeding.  A few years ago, however, Texas probate law was changed to allow the executor to file an affidavit in lieu of the inventory if the executor has paid off all unsecured debts of the estate.  The executor still has to prepare the inventory, but does not have to file it.

It should be noted that while a Texas resident need not worry too much about avoiding probate in Texas, he or she should make sure probate is avoided in other states if property is owned there.  For example, a Texas resident may have a vacation home in Colorado, and an ancillary probate in Colorado would be required to transfer ownership of the Colorado property to loved ones.  Ancillary probate can be avoided by transferring the Colorado to a trust or limited liability company.

 

 

 

 

In my last blog post I noted that it might be a good time to reconsider discount planning with family limited partnerships (FLP).  That thought has only increased over the last few weeks as the chances for tax reform dwindle.  Indeed, while political predictions are a fools game, we now have to seriously consider a move left in 2020 and, at best, a stalemate until then.  The move left could endanger discount planning again, so the next few years might be a window to make use of this kind of planning.

While this planning can involve transfers downstream via dynastic trusts, it can also involve leveraging the lifetime exemption using FLP discounts via gifts to spousal lifetime access trusts (SLATs).  A SLAT is an irrevocable trust benefiting the spouse, and then descendants.   Each spouse can create their own SLAT, provided they avoid the reciprocal trust doctrine, and the marital estate can still have use of the gifted assets during their joint lives.  In December of 2012, with the risk of the lifetime exemption being reduced, many, many SLATs were implemented.

SLATs raise a number of issues to work through, in addition to the aforementioned reciprocal trust doctrine, but, in the right circumstances, they over an elegant solution that offers a bit of a have your cake and eat it too flair.

As we watch Congress for clarity on tax reform, I am reminded of the Tom Petty song “The Waiting.”   Many clients are frozen, unwilling to do any planning.  However, the fact is tax law changes all of the time, and any “reform” today may be gone tomorrow.  Life and death go on.  The real reasons for planning transcend tax law.

You want to take care of your loved ones, and, if you have done well and have charitable goals, you want to leave something for the causes you care about.  The basic structure of a will is not going to change much even if the transfer tax is repealed.   You will still want to protect your loved ones from the uncertainties of this world, and possibly from themselves.  So trusts will still be used for protection from lawsuits and divorce, and to create a protected family resource for lending and entrepreneurship.

In addition, I have found that, while clients may be motivated a bit by tax reasons for gifting during life, they often enjoy watching their loved ones enjoy the life experiences those gifts bring.  The same is true for charitable giving.

Good planning should not be dependent on tax motivation.  Good planning should not wait for tax motivation.   So get on with it!

Charitable remainder trusts (“CRTs”) are split interests trusts, with the taxpayer retaining an income interest and charity receiving the remainder.  The CRT often is used to defer gain on the sale of highly appreciated property.  The taxpayer receives an income deduction for the value of the remainder interest going to charity and defers the capital gain on the sale of the property until he or she receives distributions from the CRT. The administration of the CRT can be tricky, however, since the private foundation rules on self-dealing apply to a CRT.

The IRS recently issued PLRs 201713002 and 201713003 in which the IRS ruled that a CRT that qualifies under Code Section 664 as a charitable remainder trust so that a deduction is available but where the taxpayer fails to take the deduction is not subject to the self-dealing rules.

Since the income tax deduction typically is not significant, a client may be willing to forgo the deduction so that he or she is not subject to the onerous self-dealing rules while still achieving tax deferral.  Forgoing the deduction could create estate and gift tax issues, and PLRs are not binding on anyone other that the taxpayer who sought and received the ruling.  Still, the rulings are fascinating and present an interesting planning option to pursue with tax counsel.