DAVID J. WILLIS ATTORNEY
http://www.LoneStarLandLaw.com
Copyright 2018. All rights reserved worldwide.

LIVING TRUSTS FOR THE HOMESTEAD


by David J. Willis, J.D., LL.M.

Introduction

The living trust is a tried and true means of avoiding probate of the homestead. A trust of this type should be distinguished from other kinds of land trusts—for example, an anonymity trust that has no probate objectives, or an investor trust that contemplates short-term acquisition of investment property or a transfer of underlying ownership by means of an assignment of beneficial interest (described in the previous chapter on land trusts as entry trusts and exit trusts, respectively).

A Living Trust as Part of an Estate Plan

A living trust that includes the homestead should be considered, along with a pour-over will, as part most middle class estate plans. Note that the emphasis here is on probate avoidance and not asset protection. Why? Because homesteads are already protected in Texas from forced sale to satisfy judgments. See Tex. Const. art. XVI, § 50; Tex. Prop. Code chs. 41, 42. So it is useful to generally distinguish between homestead-exempt assets (protected) and cash or investment assets (unprotected).

Should living trusts be used for the long-term holding of rental properties and other investments? Probably not, because trusts have no liability barrier as do LLCs, and a liability barrier should be a priority for real estate investors—which makes an LLC the preferred choice. Also, an LLC, in particular the series LLC, is better suited to holding multiple investments.  

Creating the Trust

There are three steps in the process of creating a probate-avoidance plan that includes a living trust for the homestead: (1) establishing the trust with a signed trust agreement; (2) executing and filing a warranty deed conveying the home into the trust; and (3) executing a pour-over will to move miscellaneous assets into the trust upon death.

As with other trusts, a trustor establishes the trust and conveys property into it. A trustee (or co-trustees if husband and wife) is appointed to direct trust affairs on behalf of the beneficiaries (usually the children). Since title remains in the trust, and the trust does not die, the surviving beneficiaries "inherit" the trust property but without probate or other involvement by courts or lawyers.

The doctrine of merger (Tex. Prop. Code sec. 112.034) was discussed in the previous chapter and applies equally to living trusts for the homestead. Basically, the law does not allow you to convey your own property into trust to be managed by you for your own benefit. If the purported trustor, trustee, and beneficiary are all identical, then as a matter of law it is not a trust at all.

The trust agreement should state the trust's purpose in general terms along the following lines: "to hold, preserve, maintain, and distribute the Trust Property for the benefit of the Beneficiaries, including but not limited to payment of expenses for their respective health, education, maintenance, and support as the Trustee, acting in his or her sole discretion, deems reasonable, prudent, and necessary." Texas law confers wide powers upon a trustee including selling and purchasing trust property but imposes a fiduciary duty in the management of the trust and its assets.  

The trustor usually reserves the right to revoke or amend a living trust for the homestead, so this is considered a revocable living trust. The terms of the trust are therefore not finally fixed until the trustor dies (or, in the case of husband and wife cotrustees, usually when the surviving spouse dies) at which time most living trusts become irrevocable. No deed or probate is required at the time of the trustor's death. Even though Texas has an expedited probate process, the result may be a considerable saving of time, effort, and attorney's fees.

The trust agreement, unlike the warranty deed that follows it, should not be recorded. It is a private and confidential document, the terms of which need not even be disclosed to the contingent beneficiaries.

A spendthrift clause should be included that prohibits a beneficiary from assigning his or her interest in the trust to creditors.

Trust Property

Trust property may be of any type, whether personal or real, tangible or intangible, and wherever located. Additional property may be transferred into trust at a later date after the trust is established.

The trust need not formally assume existing liabilities on trust property in order for the transfer to be effective. Property can be taken "subject to" existing indebtedness (i.e., without the trust or trustee taking any liability for the debt), or the debt can be assumed or wrapped. "Subject to" is more common in the trust context.

Real property is conveyed into trust by general or special warranty deed recorded in the county clerk's real property records. The deed should make certain specific recitals concerning the homestead nature of the property. Conveying the property by deed into the living trust is an essential part of the process since the trust agreement, by itself, does not transfer title. 

Transferring property into a revocable living trust does not reduce a trustor's assets for Medicaid purposes. Trust property is still counted by Medicaid as belonging to the trustor.

Preserving the Homestead Tax Exemption

The trust agreement should contain language that preserves (1) homestead protections available to the trustor pursuant to Texas Constitution article XVI, section 50 and Property Code chapters 41 and 42; and (2) any available homestead tax exemption whether currently on file or not. It is prudent to make express recitals to this effect in the trust agreement even though Property Code section 41.0021 states that transfer of a homestead into a "qualifying trust" retains the homestead character of the property. Similar language should also be recited in the deed into trust so as to make it clear to the local taxing authorities that a living trust has been established for the homestead. It is common for appraisal districts to require that the trust agreement or the deed contain a provision that the trustor may continue living in the property without paying rent.

Mixing Anonymity Techniques with Living Trusts

It is generally not advisable to utilize anonymity techniques when deeding property into a living trust for the homestead. Why? Because such matters are likely to become an issue only after the trustor or trustee is deceased and therefore unavailable to sign any curative deed that a title company may demand. Accordingly, a trustee should always be named in any deed associated with a living trust. The principal trust asset—the homestead—is protected anyway.

Due-on-Sale

Unlike investment land trusts, federal law creates a living trust exception to the enforcement of due-on-sale clauses on homesteads that remain owner-occupied. Garn-St. Germain Depository Institutions Act, 12 U.S.C. § 1701j-3.  Due-on-sale is therefore not a factor when contemplating a living trust for the homestead, so long as the trustor intends to continue living there.

Pour-Over Will

It is good practice for the trustor to execute a last will and testament that contains pour-over provisions designed to include in the trust any property or assets that were not previously designated. In this way, the trust and the will work together as part of an overall strategy. It is also possible to have life insurance paid directly to the living trust. This may be advantageous for purposes of paying off liens on the homestead.

The Title Company

If and when the property is sold out of the trust, a title company will probably want to see the trust agreement, or at least a memorandum of it (see Tex. Prop. Code sec. 114.086 for the information this "certification of trust" should contain).What if the trustor used a junk form from the Internet?  Following the real estate recession, title companies acquired an almost automatic resistance to any transaction with the word "trust" connected to it, so it is possible that a title company will ignore a suspect trust altogether and either require a deed from all heirs or a judicial determination of heirship—either of which can defeat the purpose of creating the living trust in the first place. 

To facilitate a title company's cooperation, the trust agreement should include release and indemnity language that a title company may rely upon in issuing title insurance. In rare cases, if all of the foregoing measures have been unsuccessful in obtaining a title company's cooperation, it may be necessary to change title companies.

Drafting and Maintaining the Trust

The purpose of a living trust is serious business and should never be relegated to fill-in-the-blank or Internet forms, most of which are not specifically designed to comply with Texas law.  Additionally, it may be necessary to make amendments to the trust agreement over the years, especially if one homestead is exchanged for another or if the names of beneficiaries change. Amendments are usually easy to do. Trust maintenance can be as important as trust formation.

DISCLAIMER

Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright 2018 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com.