Louisiana Probate Law:
Living Trusts in Louisiana
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.
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.
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.
Do living trusts avoid taxes? A living trust is neutral for federal income tax purpses. 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 $5.12 million). In calculating the size of the combined estate of a married couple, do not overlook the value of death benefits from life insurance.
WARNING: 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.
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.
TIP: Living trusts can have other advantages besides avoiding probate. If you have property in other states, it can avoid multiple probates. If you might need a trust anyway, because your children have special needs or are spendthrifts, then a living trust is ideal. The creation of a living trust also takes care of most of the work that your survivors would have to do for your succession.