I am often asked to review out of state or older trust, so this week I thought I would discuss what a trust is and a few of the basic types of trust.
A trust is a legal instrument that transfers title to designated property from the owner, called the donor or grantor, to a trustee, who holds the property for the beneficiaries of the trust. The grantor can also serve as the trustee, thereby enhancing control over the trust during the life of the grantor. In such a case, a successor trustee is usually named in case the grantor dies or is incapacitated. Depending on the size or complexity of the trust, the trustee, or cotrustee, might be an institution, so as to bring more expertise to the position.
A trust that is created as part of a will is called a testamentary trust. Testamentary trusts take effect when the grantor dies. It names the beneficiaries and gives directions for payment of the income from the trust and for disposition of the assets. The testamentary trust has the advantage of increasing the odds that an inheritance is used prudently. The trustee can manage the assets of the trust until such time as the beneficiaries are prepared to do so, as opposed to an immediate transfer of assets to the beneficiaries.
The second category of trusts is the living, or inter vivos, trust, which is created during the grantor lifetime. An important decision for a living trust is whether the trust will be revocable by the grantor or irrevocable. In either case, the assets are retitled in the name of the trust. This is often an area that is overlooked. Many grantors spend a great deal of money and time having a trust prepared, but fail to place their property in the trust or as assets change or are acquired, they do not continue to put them in the trust.
Many package trust I have reviewed also contain a pour over will. The purpose of this will is to convey anything that was not placed into the trust during the grantor’s lifetime into the trust at his/her’s death. However, this will equire probating the will to do so. A fact that is often overlooked by those creating the trust for the purpose of avoiding probate.
As the name suggests, a revocable trust may be dissolved entirely by the grantor. But short of that, the grantor may also change beneficiaries, replace the trustee, or change the composition of the assets in the trust. Revocable trusts do not remove assets from the grantor’s estate. The trust pays taxes on its income, and if any assets remain in the trust at the death of the grantor, they are part of his estate and at least potentially taxable as such. A revocable trust has few tax advantages.
An irrevocable trust permanently takes assets out of the grantor’s estate and puts them into the trust. While tax savings can be realized with an irrevocable trust,this type of trust is not to be entered into lightly, as it will take action by a court to alter it later. For tax purposes, the trust becomes a separate entity. Assets in the trust generally are not subject to estate taxes on the death of the grantor, but the transfer of assets into the trust may be subject to gift taxes. It is important to note that estate taxes may not even apply to the grantor’s estate. In order for them to apply the estate must exceed $2,000,000.00. An amount that will increase over the next several years.
When the grantor for a living trust dies, the trust assets pass directly to the beneficiaries. This is a way of conveying the property to who the grantor wishes outside of probate. However, avoiding probate should not be the main factor, especially in Texas where probate is relatively simple and inexpensive. A living trust also maintains the privacy of the estate. In Texas maintaining the privacy of the estate’s assets may also be achieved through probating an estate as a Muniment of Title. So again, this should not be the only factor the creation of the trust is based on.
Effective use of trusts in estate planning requires not only awareness of these trust basics, but familiarity with specialized trusts that might be a good fit for particular cases, such as those involving life insurance policies and charities. To decide on and implement the best option, use the services of a qualified attorney.
The attorney should be familiar with probate in Texas and the many advantages Texans have. Additionally, your attorney should work with your financial advisor with your estate plan to make sure everyone is working on the same goal.
Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. www.moakandmoak.com