Trusts FAQ

What is a Trust?

A trust is a legal relationship in which one person or qualified trust company (“trustee”) holds property for the benefit of himself or herself or of another (“beneficiary”). The property can be any kind of real or personal property—money, real estate, stocks, bonds, collections, business interests, personal possessions, and automobiles.

A trust generally involves at least three people: the grantor (the person who creates the trust, also known as the “settlor” or the “donor”), the trustee (who holds and manages the property for the benefit of the grantor and others), and one or more beneficiaries (who are entitled to the benefits).

Think of a trust as an agreement between the grantor and the trustee. The grantor makes certain property available to the trustee, for certain purposes. The trustee (who often receives a fee) agrees to manage the property in the way the grantor wants.

Putting property in trust transfers it from your personal ownership to the trustee who holds the property for you. The trustee has legal title to the trust property. For most purposes, the law looks at these assets as if the trustee now owned them. For example, many (but not all) trusts have separate taxpayer identification numbers.

But trustees are not the full owners of the property. Trustees have a legal duty to use the property as provided in the trust agreement and as permitted by law. The beneficiaries retain what is known as equitable title or beneficial title, the right to benefit from the property as specified in the trust.

When are Trusts Set up?

Many trusts are set up in wills—a testamentary trust—and take effect upon death. Others can be established while you are still alive.

What is a Living Trust?

A living trust is simply a trust established while you are still alive. It can serve as a partial substitute for a will. Upon the death of the person creating the trust, its property is distributed as specified in the trust document to beneficiaries also specified in the document.

As in other kinds of trusts, there are potentially three parties to a living trust (creator, trustee, and beneficiary, though in many living trusts all three are the same person). If you set up a revocable living trust (see information, below) with yourself as trustee, you retain the rights of ownership you’d have if the assets were still in your name. You can buy anything and add it to the trust, sell anything out of the trust, and give trust property to whomever you wish.

How do I Know Whether a Living Trust is Right for Me and My Estate?

A trust is likely to help under the following conditions:

1.         Your estate has substantial property or assets that are difficult or costly to dispose by a will.  (Generally, you should consider a Living Trust if your estate is more than one and one-half million dollars.  That’s a wonderful “problem” to have!)

2.         You don’t want the task of managing your property (say you rent out a number of condos). A living trust allows you to give those duties to your trustee while you receive the income, minus the trustee’s fee, if any.

3.         You want your estate administered by someone who doesn’t live in your state. A living trust might be better than a will because the trustee probably won’t have to meet the residency requirements some state laws impose upon executors.

4.         You have property in another state. Many lawyers recommend setting up a living trust to hold the title to that property. This helps you avoid additional probate procedures in another state, called ancillary probate procedures, which can be complicated.

What Exactly Can a Living Trust Do For Me?

A trust is an important estate-planning tool. The flexibility of trusts makes them useful for many different people with all kinds of needs. In addition, trusts can do a number of things wills can’t do, such as

• manage assets efficiently if you should die while your beneficiaries are minors;
• protect your privacy (unlike a will, trusts are confidential);
• provide a way to care for you if you should become disabled;
• avoid probate;
• speed transfer of your assets to beneficiaries after your death; and
• provide more options than a simple will (living trusts give you wide flexibility in distributing your property).

In addition, depending on how they’re written and on state law, they can protect your assets by avoiding creditors and reducing taxes. However, this usually requires the trust to be irrevocable, unlike most living trusts. If you want to lower taxes and shelter assets from creditors, you’ll have to take special steps to go beyond what living trusts generally do.

What Can’t a Living Trust do For Me?

A living trust is a very important estate-planning tool. But it can’t do everything. Here’s a summary of what it can’t do.

1.         It won’t necessarily help you to avoid taxes. A revocable living trust doesn’t save any income or estate taxes that couldn’t also be saved by a properly prepared will. Trust property still is counted as part of your estate for the purposes of federal income and state and federal estate taxes. Your successor trustee still has to pay income taxes generated by trust property and owed at your death. (Your executor would have to pay such taxes out of your estate if the property was controlled by a will instead of a trust.) And if the estate is large enough to trigger federal or state estate or inheritance taxes, your trustee will be required to file the appropriate tax returns. These and other duties can make the cost of administering an estate distributed by a revocable living trust almost as high as traditional estate administration, at least in some states.  And, it could actually cost you money if you live in a jurisdiction that gives senior citizens a tax break on property taxes.  Since the trust will “own” your property, instead of you, you may miss out on a reduction in your property taxes.

2.         It won’t make a will unnecessary. You still need a will to take care of assets not included in the trust. If you have minor children, you probably need a will to suggest or nominate a guardian for them. While only a court can appoint a guardian, courts strive to implement your wishes in this regard if you have stated them.

3.         It won’t affect nonprobate assets. Like a will, a living trust won’t control the disposition of jointly owned property, life insurance, pension benefits or retirement plans payable to a beneficiary, or other nonprobate property.

4.         It won’t necessarily protect your assets from creditors. Creditors can attach the assets of a revocable living trust. In fact, since the assets you put in a living trust don’t have to be probated, they could lose the protection of the statute of limitations, which means that your creditors have longer to get at them.

5.         It won’t necessarily protect your assets from disgruntled relatives. While it is harder to challenge a living trust than a will, a relative can still bring suit to challenge the trust on grounds of fraud, undue influence, or duress.

6.         It won’t entirely eliminate delays. A living trust might well lessen the time it takes to distribute your assets after you die, but it won’t completely eliminate delays. Many state laws impose a waiting period for creditors to file claims against estates of people with living trusts. The trustee still has to collect any debts owed to your estate after you die, prepare tax returns, pay bills, and distribute assets, just as would the executor of a will. All this takes time.

Why Doesn’t a Revocable Living Trust Save Taxes?

When you put property in a revocable living trust, the trustee becomes its owner, which is why you must transfer title to the property from your own name to that of the trustee. But you retain the right to use and enjoy the property and, because you do, under the tax law the property in the trust belongs to you for tax purposes. Thus, if the trust receives income from the assets, you must report the income from the trust on your individual income tax return.

How Can a Living Trust Help If I Become Disabled?

You can set up a living trust, name a reliable co- or successor trustee to manage your property contained in the trust should you become ill, and fund the trust adequately by transferring title of assets to the trustee (or give someone in whom you have confidence power of attorney to do so in the event of your incapacity). This avoids the delay and red tape of expensive, court-ordered guardianship. And, at the same time, the trustee can take over any duties you had of providing for other family members.

Once I Put My Property in a Revocable Living Trust, Can I Still Manage It or Sell It?

Yes. In a revocable living trust, you can retain the right to manage the trust property. This right includes the right to sell any of the property you placed into the trust.

Can’t A Living Trust Substitute For A Will?

Not entirely. A living trust can be a very useful part of estate planning. However, it alone can’t accomplish many of the most important goals of estate planning. For example, you may have to have a will to nominate a personal guardian for your children, even if you have a trust. And even with a living trust, you’ll need a simple will to dispose of property that you didn’t put into the trust.  You would be amazed at how many of our clients think that they put everything of value into the trust, but we later learn that they overlooked some valuable asset.

Probate is also no longer the costly, time-consuming demon it used to be, especially in Texas. So preparing at least a simple, auxiliary will is recommended for just about everyone.

What Other Kinds of Trusts are There?

As discussed above, living trusts enable you to put your assets in a trust while still alive. You can wear all the hats—donor, trustee, and beneficiary—or have someone else be trustee and have other beneficiaries.

There are many, many other kinds of trusts that serve the particular needs of their grantors. Here’s a brief rundown of some of the most popular trusts. Your lawyer can help you decide if they’re right for you and can help you set one up.

• Support trusts direct the trustee to spend only as much income and principal as may be needed for the education, health care, and general support of the beneficiary.
• Discretionary trusts permit the trustee to distribute income and principal among various beneficiaries as he or she sees fit.
• Charitable trusts support a charitable purpose. Often, these trusts will make an annual gift to a worthy cause of your choosing.
• Dynasty trusts (also sometimes called wealth trusts) can last for a number of generations, and sometimes can last forever. They can help those with great fortunes control the distribution of their wealth over a very long period.
• Generation-skipping trusts are tax-saving trusts that benefit several generations of your descendants.
• Insurance trusts are a device used to avoid or, at least, minimize federal and state estate taxes. Here, trust assets are used to buy a life insurance policy whose proceeds benefit the creator’s beneficiaries.
• Special needs trusts are for people with disabilities who want to keep their government benefits. Medicaid trusts (also sometimes called “Miller Trusts”) are a particular kind of special needs trust. They help you qualify for federal Medicaid benefits. This device is mostly used when family members are concerned with paying the costs of nursing-home care.

I Understand That if I Create a Trust, I No Longer Own the Property–the Trustee Does. This is Profoundly Unsettling to Me. How Can I Be Sure that the Property Won’t be Misappropriated?

The trust instrument itself, together with hundreds of years of legal cases and the current law in Texas, provide rules for how the trustee must act. In legal terms, this body of law spells out the trustee’s duties with respect to the trust property. To assuage your doubts, you might ask your lawyer to explain the trustee’s duties and your legal rights.

Why do People Use Trusts?

The reasons vary. Parents, for example, might use a trust to manage their assets for the benefit of their minor children in the event the parents die before the children reach the age of legal adulthood. The trustee can decide how best to carry out the parents’ wishes that the money be used for education, support, and health care.

A trust is a good idea for anyone who is unable to manage money and other assets prudently. For someone who is unable to manage his or her estate because of mental or physical incapacity, a trust is an effective way to avoid the expense and undesirable aspects of a court-appointed guardian.

Should I Consider Setting Up a Trust?

It depends on the size of your estate and what you want to do with it. For example, if you are primarily interested in protecting yourself in the event you become unable to manage your estate, a living trust is a good option. If you want to provide for minor children, grandchildren, or a disabled relative, a trust might be appropriate. Before making a decision, consult one of the estate-planning lawyers at Buckner & Cross, L.L.P.

This article is not intended to be legal advice and is not a substitute for legal representation by an attorney. You are encouraged to seek the advice of your own attorney to answer any specific legal questions you may have.