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.

What are the 3 Main Roles In A Trust?

There are three players in a Trust:

  1. The Settlor – Who establishes and sometimes funds the Trust.
  2. The Trustee – Who administers the Trust.
  3. 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 advantage, 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 more categories – revocable and irrevocable.

Which Trust Is Right For You?

The first challenge is 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 distributions 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, a Trust can be a great tool.

Virginia Hammerle is a Texas attorney whose practice includes estate planningguardianship and probate. Sign up for her newsletter at legaltalk@hammerle.com. Contact Hammerle Finley Law Firm to schedule a consultation at hammerle.com.

This column does not constitute legal advice.