By Abraham C. Bloomenstiel
Vecchio Bloomenstiel PLLC
This past week our firm got a lot of calls about the same issue. The conversations went pretty much like this: “I put my house into a trust because I wanted to avoid probate, but now I cannot afford my property taxes! What happened to my homestead exemption?!?” We also heard this one a few times: “I put my house into a trust a long time ago to protect it from my creditors. I just declared bankruptcy, but now I am losing my house! Where is my homestead protection?!? Why doesn’t the trust protect my home?”
This is the core problem: if you put your house into a trust, then you no longer own your home. The trust owns it. That means that… and you can probably see the problem now… it has NO homestead protection. You will pay full property taxes, your creditors can attach to the house, it can be liquidated in bankruptcy, etc.
The good news is that this is a fixable problem. The Texas Property and Property Tax codes allow for a trust to be constructed to preserve homestead protection. Depending on the nature of the trust and provisions of the trust instruments, the trust can usually be modified or decanted to fix the issue. However, you will need an estate planning lawyer’s assistance with this.
How does someone fall into this Trust/Homestead problem in the first place? In the four or five calls we took this week about the issue, they all shared two things in common: 1) a mistaken assumption about the need for a trust to avoid probate in Texas or to insulate a homestead from creditors, and 2) these were all “do it yourselfers” who prepared their own estate documents using forms purchased online.
Let’s start with using a trust to protect your home from creditors. Texas has some of the strongest homestead protection laws in the county. So, 99% of the time it is better to leave your home as-is and it will automatically be protected from creditors under the Texas Constitution.
Regarding using a trust to avoid probate: In some states, the rule is “you-must-have-a-trust” to avoid probate. Not so in Texas. In Texas, probate is cheaper and far less intrusive than in other states. If your only reason for setting up a trust is to avoid probate, then you are probably inviting unnecessary costs and difficulties. There are plenty of reasons for having a trust, but simply avoiding probate isn’t enough of a reason to set up a trust in Texas.
Lastly, let’s discuss online estate forms. There are a lot of good forms online–I can’t deny that. Some are even excellent. However, these forms are drafted as broadly and “vanilla” as possible so they can be used by as many people as possible. That means that they cannot address anything that makes your estate or wishes unique. Using them may save you some money, but they have other hidden costs.
A perfect example of these hidden costs is the homestead problem. Many of the trust forms available online will not preserve your homestead protection because they do not meet the statutory requirements under Texas law. As a result, putting your home into a trust created with these documents will actually destroy your homestead protection completely, potentially exposing you to thousands of dollars of property taxes and losing your home to creditors.
For most people, their home is the biggest asset. But, it is more than just an asset. It is, well, home. Don’t take chances with your home. If you are considering setting up a trust, speak with a Plano, Texas estate planning attorney about your needs. Our firm regularly handles estate and trust planning, as well as trust modification to protect and preserve Texas homesteads.