A Living Trust is an ownership arrangement where property is held in the name of a "trustee" rather than in the name of the person who really owns the property (called the "Grantor" or "Settlor" of the trust).

As the legal owner, the trustee generally has the right to manage, administer and dispose of the property. The beneficiary is typically entitled to all the benefits of the property, including its income, appreciation and use. The trustee can be, and often is, the same person as the beneficiary of the trust. Setting up a Living Trust is like incorporating an existing business. Incorporating requires you to sign papers, contribute property, keep records and file various tax forms. After incorporating, the operation of the business would likely change very little, but you would be operating under the name of a new corporation. Similarly, after creating the Living Trust, your properties would be held in the name of a trustee, but they would still be available to you at any time.

While corporations are set up primarily to limit liability, Living Trusts are created for other reasons, some of which include the following.

First, some people really want to avoid probate, even though probate is usually very simple in Texas (assuming there is a valid will). Generally, any assets that have been transferred to a Living Trust will pass directly to the named beneficiaries of the trust, without the need for probate. Living Trusts are popular in states where probate costs and attorney fees are high and where probate is always supervised by the courts.

Second, Living Trusts address the issue of disability. The Grantor can name a person or trust company to serve as trustee to take over management of the financial affairs of the Grantor should the Grantor become incapacitated. Some wealthier people turn over management of their investments to a trust company before they are incapacitated because doing so greatly simplifies their lives.

Third, if you own property outside Texas, a Living Trust is a good way to avoid probate in that state. By deeding the out of state property to the revocable Living Trust, the necessity of hiring an out-of-state attorney can be avoided. Unlike Texas, some states allow attorneys to charge a probate fee equal to a percentage of the estate.

Fourth, property owned by the Living Trust will not become commingled with other property. For example, you may have inherited property that you do not want to become commingled with your spouse's property. This inheritance can be placed in a Living Trust. But don't forget, income earned on the property is still community property, even if it is in the Living Trust, unless there is an agreement to the contrary.

Fifth, if you are very wealthy, and you do not want your property to be listed on a probate inventory, then you can place all or a portion of it in a Living Trust. Upon your death, the trust property will pass to the beneficiaries of the trust without public scrutiny.

Living Trusts can accomplish many things. However, most people still choose to have wills, and there are a number of reasons why.

First, probate is not so horrible in Texas that it must be avoided at all costs. The only contact with the probate court is, in most instances, the hearing to probate the will and the filing of an inventory of the estate's assets. The cost of probate in Texas is typically much lower than in other states.

Second, if you do create a Living Trust, and you fail to transfer all of your probate assets to the trust, then probate, and most of the associated costs, will still be required.

Third, regardless of whether you have a living trust or a will, if your estate exceeds $1,000,000 in 2002 (increasing to $3,500,000 by 2009), then a Federal estate tax return and Texas inheritance tax return must be filed within nine months of your death. Preparation of these forms is usually more complicated, and therefore more expensive, than the probate proceedings in the courts.

Fourth, it can be very difficult to transfer all of your property to the Living Trust, especially if you own lots of property. Every asset you own or purchase for the rest of your life must be titled in the name of the Living Trust. Also, some banks will not allow you to change the name on a certificate of deposit to the trustee without incurring a surrender charge.

Fifth, a separate legal document called a Power of Attorney can address the issue of disability. However, it may not be accepted by all banks, brokerage houses, title companies, etc. If a Power of Attorney is not accepted, usually the only way to free the assets is to seek a guardianship, which can be time-consuming and expensive.

Sixth, Living Trusts do not protect the trust property from creditors, and they do not save any more estate taxes than can be saved with tax-planned wills. There is no dollar amount of net worth that triggers a need for a Living Trust. Whether or not a Living Trust is appropriate for you depends on your particular estate planning needs and concerns. Before creating a Living Trust, meet with an attorney who specializes in this field.