In Texas, trusts are less commonly integrated into a typical estate plan than they are in other states. The reason for this is that the probate process in Texas is, in many instances, relatively simple and inexpensive. Probate avoidance – one of the primary reasons why people create trusts –is not a pressing concern. Compare this, for example, to the famously expensive and time-consuming probate regime in California, a state in which trusts are used heavily as an estate planning tool.
Even in Texas, however, the ability to transfer one’s estate to surviving family and loved ones without the need for probate is a desirable feature for many people. Moreover, Texas trusts serve many additional purposes beyond mere probate avoidance that may make them appropriate for inclusion into an individual’s estate plan.
What is a trust?
Trusts are legal arrangements that involve three parties: the grantor (also referred to as a “trustor” or “settlor”), who creates the trust and transfers assets into it; the trustee, who manages and administers the trust according to the terms set by the grantor; and the beneficiaries, who receive the benefits of the trust.
What is the purpose of a trust?
The purpose of a trust in Texas, as in other jurisdictions, is to manage and distribute assets according to the wishes of the grantor. Trusts can serve various purposes depending on the specific goals and needs of the grantor. Some common purposes of trusts in Texas include:
- Probate Avoidance. Trusts can help avoid probate, which is the legal process of distributing a deceased person’s assets. Probate can be time-consuming and costly, and a trust can provide a more efficient way to transfer assets to beneficiaries upon the grantor’s death.
- Asset protection. Trusts can be used to protect the grantor’s assets from creditors, lawsuits, and other claims. This can be particularly useful for individuals with significant wealth or those in high-risk professions.
- Tax planning. Trusts can help minimize estate taxes and income taxes for the grantor and beneficiaries. By setting up a trust, the grantor can transfer assets out of their estate, reducing the overall estate value and potentially lowering estate tax liability.
- Control over asset distribution. Trusts allow the grantor to maintain control over how their assets are distributed to beneficiaries. The grantor can set specific terms and conditions for asset distribution, ensuring that their wishes are carried out even after their death.
- Providing for minor or financially inexperienced beneficiaries. Trusts can be used to manage assets on behalf of beneficiaries who may not be capable of managing the assets themselves, such as minors or individuals with limited financial experience. Because minors cannot inherit from a decedent’s estate, trusts are also used to avoid having to initiate guardianship proceedings for minor beneficiaries.
- Special needs planning. Trusts can be established to provide financial support for beneficiaries with disabilities without affecting their eligibility for government assistance programs, such as Supplemental Security Income (SSI) or Medicaid.
- Charitable giving. Trusts can be set up to benefit charitable organizations or causes, allowing the grantor to support their philanthropic goals while also potentially receiving tax benefits.
What types of trusts are there?
There are various types of trusts available in Texas which can be established for one or more of the purposes identified above. Some common types of trusts include:
- Revocable living trusts. This type of trust can be amended or revoked by the grantor during their lifetime. They are typically used for estate planning purposes, such as avoiding probate, minimizing estate taxes, and maintaining privacy.
- Irrevocable trusts. Once established, these trusts generally cannot be modified or terminated by the grantor. Irrevocable trusts can be useful for asset protection, minimizing estate taxes, and providing for beneficiaries with special needs.
- Testamentary trusts. These trusts are created by a will and come into effect only after the grantor’s death. They can help manage assets for minor or financially inexperienced beneficiaries and provide a measure of control over the distribution of assets.
- Charitable trusts. These are established to benefit a charitable organization or cause. They can provide the grantor with tax benefits while fulfilling philanthropic goals.
- Special needs trusts. Designed to provide for the financial needs of a disabled beneficiary without jeopardizing their eligibility for government assistance programs, such as Supplemental Security Income (SSI) or Medicaid.
- Spendthrift trusts. These trusts protect the beneficiary’s assets from creditors and prevent beneficiaries from squandering their inheritance.
What are the requirements to make a trust in Texas?
For a trust to be considered valid in Texas, it must meet the requirements enumerated in the Texas Trust Code. The following elements must be met to create a valid trust:
- Grantor must have legal capacity. The grantor who creates the trust must have the requisite legal capacity to do so. This means that the grantor must be at least 18 years old and of sound mind, capable of understanding the nature and consequences of their actions.
- Clear intention to create a trust. The grantor must demonstrate a clear intent to create a trust. This intention can be expressed in writing or verbally, although a written trust agreement is highly recommended for clarity and enforceability.
- Trust purpose. The trust must have a lawful purpose that is not illegal or against public policy. Trusts that promote illegal activities or have objectives that violate public policy will not be considered valid.
- Trust property. There must be identifiable trust property, also known as the trust corpus or principal. This can include assets such as real estate, cash, stocks, bonds, or other tangible or intangible property.
- A trust must have at least one named trustee who is responsible for managing and administering the trust according to the terms set by the grantor. The trustee can be an individual, a corporate entity (such as a bank or trust company), or a combination of both.
- Identifiable beneficiaries. The trust must have identifiable beneficiaries who will receive the benefits of the trust. Beneficiaries can be specific individuals, classes of people (e.g., the grantor’s children), or even charitable organizations.
- Proper trust terms. The trust agreement should include clear terms that outline the rights, duties, and responsibilities of the trustee, as well as the manner in which the trust assets will be managed, invested, and distributed to the beneficiaries.
Is a trust right for you? Let’s have a conversation.
Our experienced trust attorneys will help you decide whether a trust should be included as part of your estate plan. Call us at (210) 418-1150 or send us a message by completing the intake form on our website to schedule a consultation.