Texas Trusts

What is a Trust?

A trust is an arrangement involving three parties, the trustor, the trustee, and the beneficiary.  The trustor is the creator of the trust who transfers real or personal property to the trustee of the trust.  The trustee holds the transferred assets for the benefit of the third party who is the beneficiary of the trust.

The trustee of the trust is a fiduciary.  The trustee has a fiduciary duty to (a) act in the interest of the beneficiary, (b) make reasonable and prudent decisions, and (c) avoid self-dealing and conflicts of interest.

Types of Trusts

There are many different types of trusts.  If the trustor creates the trust while he is alive, the trust is an “inter vivos trust.”  If the trust only comes into existence on the death of the trustor, the trust is referred to as a “testamentary trust.”

Trusts are also “revocable” or “irrevocable.”  In a revocable trust, the trustor can terminate the trust and put the assets back into his own name.  In an irrevocable trust, the trustor permanently transfers the assets to the trust and no longer may make changes in the trust.

Let’s look at a few of the many different kinds of trusts.

Blind Trust – a trust where the trust beneficiary has no knowledge of the trust assets and the trustee has full discretion over the assets.  A politician may say “If I am elected, I will put all my assets in a blind trust so I will not have any conflict of interest.”

Revocable or “Living Trust” – a trust where the trustor can terminate or amend the trust.  This trust is a common estate planning tool.  Often this trust will become irrevocable on the death of the trustor.

Credit Shelter Trust (also called a bypass trust) – a trust funded with an amount up to but not exceeding the estate tax exemption.  It is often used to avoid increasing the taxable estate of a surviving spouse.  Assets in this trust can grow and still not be subject to estate tax.

Irrevocable Life Insurance Trust (ILIT) – a trust designed to take life insurance out of your estate and on your death, provide money to pay estate costs and income to your beneficiaries.

Supplemental Needs Trust – a trust designed so that a disabled beneficiary (physical or mental) can have the benefit of trust assets for “supplemental” care without forfeiting governmental benefits or failing to qualify for such benefits.

Miller Trust (Qualified Income Trust) – a trust designed to receive income of a beneficiary desiring to qualify for Medicaid long-term nursing home care, but having too much income to qualify.  Only income (not assets) goes into the trust and this income must be spent no later than the last day of the month following the date of receipt.  On the death of the beneficiary, any income not spent is paid to the state.

Qualified Personal Residence Trust (QPRT) – a trust where the only asset is the trustor’s home.  The trustor retains the exclusive use of the home for a period of years.  If the trustor survives the full retained interest term, the home will not be a part of the trustor’s taxable estate.

Children’s Trust (Kiddie Trust) – a very common trust created on the death of a parent or parents having minor children.  The trustee uses the trust to benefit the children until they are no longer minors or until they reach a certain age or ages.

For more information about trusts and how they may apply to your estate, call Hammerle Finley Law Firm.