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Probate law:
The living trust in Louisiana, part one

Are living trusts the best estate plan to ever hit Louisiana or are they just a gimmick that do not deliver as promised? Arguments are made on both sides by estate planners who are educated and experienced in this area. The fact that there is controversy makes it hard to decide who to believe and whether a living trust is a good choice for your estate plan. The only way to resolve this question is to first explain what a living trust is, and then go through the good and bad points. You can then decide for yourself.
 

 New Homestead Law
There is a new amendment to the Louisiana Constitution that went into effect this year. The amendment makes it clear that revocable trusts do not qualify for the homestead exemption. However, anyone who puts their home into their living trust and reserves the lifetime usufruct still will get the exemption. We recommend that people simply reserve the lifetime usufruct of their homes as part of the transfer to their living trust. This will preserve the exemption.

Related Topics

 What is a living trust?  The concept of a living trust is not new to Louisiana. Only the name "living trust" and the idea of using this type of trust as part of an estate plan are new. The living trust phenomenon started in California as a method to avoid the probate procedure. The living trust is simply a revocable inter-vivos trust which has been authorized  in Louisiana for as long as we have had a Trust Code.



 

A revocable trust can be amended or revoked at any time by the person who creates the trust (the "settlor"). Typically, you would name yourself (and your spouse if you are married) as trustee (or trustees). Upon death or incapacity, you name a successor trustee. In the meanwhile, you receive the income from the trust and can amend or revoke at any time. You can sell assets, borrow money, and, in general, treat the assets in the trust pretty much the same way you did before the assets were in your trust.

Does a living trust avoid probate? The basic idea behind any type of trust is that the trust owns assets for the benefit of a person or group of persons. Since the trust, not you, owns the assets, your death is not relevant to how those assets are handled. If you sell your house to a stranger, your house is not part of your estate and is not subject to probate. The same is true if you transfer your house to a trust. You do not own it at the time of your death and probate (but not estate tax) is avoided. As simple as this basic concept sounds, the biggest problem with living trusts is making sure that all assets are properly transferred to the trust. Any asset that is overlooked may make probate necessary.

What exactly are you avoiding if you avoid probate? Louisiana does not impose a probate fee like California and some other states. In Louisiana, the cost of probate is court costs and attorney fees. Court costs will typically be under $300 unless something is contested or if there are minor heirs. In any event, court costs never amount to any significant amount. The attorney fees are another matter. Since attorneys can charge any "reasonable" amount to handle the succession, we have seen fees range from very reasonable to very unreasonable. You might expect the average fee to be about 2% of the gross estate, although we have seen a fee of $25,000 charged for a $85,000 estate. The probate process also involves time delays. It can sometimes takes years to finish a succession and distribute the funds to heirs. More often than not, however, the time to finish a probate is measured in months rather than years.

Do living trusts avoid taxes?  A living trust is neutral for federal income tax and Louisiana inheritance tax. Since these types of trusts can be revoked, they are considered an uncompleted gift. It is not complete until you die and can no longer change your mind. You report any income you receive from trust property on your annual 1040 just as you do now. There is no less tax, but there is no additional work. Federal estate taxes, however, are a different matter. A living trust can save a great deal of estate taxes for married couples with an estate that exceeds the federal estate tax exemption (currently $2 million). In calculating the size of the combined estate of a married couple, do not overlook the value of death benefits from life insurance.

A living trust created for a married couple can insure that two federal tax exemptions are used. This variation of the living trust is sometimes called an A-B living trust and makes provision for the automatic split of the living trust into two trusts when the first spouse dies. A maximum of $2,000,000 (in 2006) goes into the "B" trust which in not revocable. The remainder goes into the "A" trust which is still revocable. The surviving spouse is still income beneficiary of both trusts. In the typical situation in which the spouses do not have a will, or in which they have wills that leave everything to each other, only one $2 million exemption is available. This happens because one spouse inherits everything from the deceased spouse and does not pay death taxes because of the unlimited marital deduction. When the surviving spouse dies, however, only one exemption is available for an estate that is made up of all the property owned by the two spouses. The heirs pay federal estate taxes on all amounts over the $2 million. The tax starts at 37% which means that a large amount of additional taxes are due if the estate is large enough and if both exemptions are not used. A living trust will therefore save estate taxes when compared to a simple will or no will at all when the property of the spouses (including life insurance) exceeds $2 million.

 As to Louisiana inheritance taxes, the living trust is no help. Each heir or beneficiary is taxed based on what they receive whether by will or by trust. Unlike the federal tax, the Louisiana tax has been eliminated as of July 1, 2006. However, be aware that if you do not open a succession or file a copy of the trust within 9 months of the date of death, then there may be an inheritance tax obligation.

Detractors of the living trust will quickly point out that both exemptions can be used by leaving up to $1,000,000 to the children by will and giving the spouse the usufruct of the children's inheritance or by setting up a testamentary trust. This is certainly true, but very few people seem to elect these methods of making sure both exemptions are used.

 Beware of living trust kits.
There are many "kits" for doing your own living trust. The last time we looked, every last one of the do-it-yourself kits were totally invalid in Louisiana.


A living trust should be prepared by a Louisiana attorney.
Most trusts that we have seen that are marketed throughout the United States have problems when it comes to Louisiana law. We have some particular issues here such as forced heirship that are not addressed in living trusts that are prepared for general consumption. We also have problems with powers of appointment that are commonly found in trusts that are not specifically geared for Louisiana.
 

Living trusts do not avoid all probate type fees.
Regardless of the type of estate plan, estate and inheritance taxes will have to be paid. To prepare the returns, sworn lists of assets and debts, affidavits of death and heirship, and tax returns will have to be prepared, and property will have to be transferred to the beneficiaries. An attorney or accountant normally will have to be hired to accomplish the tax reporting requirements. If a federal tax return is due, that can get quite expensive. Still, a living trust will usually be significantly less expensive than probate.


The number one problem with living trusts.
The biggest problem with doing a living trust is also the easiest problem to avoid. That is, making sure all assets that would be subject to probate are actually transferred to the living trust. It is amazing to see how many living trusts have to have a probate because some item of property was either never transferred when the trust was created or was acquired after the trust was created, but not in the name of the trust. We estimate that one-fourth or more  of living trusts end up needing some probate work.

 Go to part two of Living Trusts ------>>