A Trust is a legal chameleon.
At its most basic, a Trust is an agreement by a fiduciary (trustee) to hold property for the benefit of another. A Trust is not a separate legal entity.
There are three players in a Trust – the settler (who establishes and sometimes funds the Trust), the Trustee (who administers the Trust) and the beneficiary (for whose benefit the Trust exists).
A Trust should always be established with a specific objective in mind. A Trust may be used to minimize taxes, control property after the grave, protect assets, provide money for special needs children and adults and avoid probate. There are usually trade-offs involved – it may be loss of control and ownership, taking a short-term tax hit for a long-term disadvantage, or limiting access to keep the assets from creditors.
Texas has a Trust Code that applies to express trusts (usually written) that contain property. The Code does not apply to constructive trusts (which is a remedy in a lawsuit and not technically a trust at all), resulting trusts (which apply to some situations involving real property) , business trusts (which are considered partnerships) and deeds of trust (Texas’ version of mortgages).
Most estate planning involves two types of written trusts – testamentary (contained in a will) and living. The living trusts are divided into two other categories – revocable and irrevocable.
Now comes the tough part: choosing the right trust. There are all sorts of single-purpose living trusts that are accepted by the IRS for favorable tax treatment. With the right language, life insurance policies, annuities and investment properties can be held in a Trust and not included in someone’s estate. There are also Trusts that allow individuals to qualify for government benefits. Trusts are often used in second marriages to equalize property among children.
The second challenge is making the Trust stick. It has to be properly drafted, name a qualified Trustee, and be properly funded. The Trustee has a fiduciary duty to the beneficiary. A bonded corporate trustee is an excellent choice for a trust with more than $500,000 in corpus (trust property); although there are some corporate trustees that will serve on smaller trusts.
In the hands of a sophisticated planner, Trusts can be a great tool.