Before we can discuss what five elements are necessary when forming a trust, we ought to find out what a trust is. Their trust is a relationship regarding property involving three people. The trustor or donor is the person who transfers property into the trust. A trustee is the person who is given ownership or legal title to the property. The trustee’s role in the trust is to manage that property per the instructions of the trust itself. Finally, the beneficiary of a trust is the person who is given the benefit of the property.
Let’s take an example to better illustrate what these roles are as far as their trust is concerned. Suppose that Daniel transferred $1 million and his farm to Martha. Daniel instructs Martha to invest this money and then rent out the farm with all the investment income and rent to be paid to Samantha for as long as she lives. When Samantha dies, any remaining property contained in the trust including the farm will be transferred to David.
In this example, Daniel is the trustor. The property of the trust is the farm and the $1,000,000. Martha is the trustee, and she owes a fiduciary duty to any beneficiary of the trust. Samantha is known as the life beneficiary of the trust because she has had an interest in the property for as long as she lives. David is the remainder beneficiary because he would receive any property left in the trust after Samantha passes away.
How do you create a trust?
For you to have a valid trust the following requirements must be met. First, you as the grantor need to have the capacity to create the trust. This means that you must be cognizant of what you are doing and be in a position where you understand the consequences of creating the trust and transferring ownership to a trustee. That trustee would have the authority to make decisions that are in line with the purposes of a trust as created by the trust documents. A grantor must be over the age of 18, as well.
Next, you would need to have the intent necessary to create trust. Your goal with trust creation would need to be that you intend to benefit the beneficiaries of the trust by placing property into the trust. As we saw in our previous example, property within the trust can be invested, distributed, are utilized for some other purpose. It would need to be clear from your intentions that you wanted to create trust.
Third, you would need to list at least one definite beneficiary in the trust formation documents for you to create a trust. Whether you create a trust with multiple beneficiaries or only one you need to have clearly outlined a person or entity who would stand to benefit from the creation of that trust. It need not be a person, either. You can create a trust and the beneficiary of that trust could be a charitable organization, your church, or any other charity or nonprofit organization.
The trustee of the trust would need to be able to have some duties in terms of their performance. The trustee would have legal ownership of the property that you transfer into the trust. This means two things for you to be aware of. First, you need to be very clear in your trust formation documents about the actions that your trustee can and should take regarding the property. You also need to make sure that the trustee is someone that you can trust (no pun intended). Remember that the property once placed into the trust would no longer be yours.
Finally, the person you name as the sole trustee and the sole beneficiary cannot be the same. This would represent a conflict of interests. However, bear in mind that if you name multiple beneficiaries or multiple trustees then there can be overlap between these roles in that case. The reason why the law does not want to permit a beneficiary to also be the only trustee is that beneficiaries oftentimes have short-term goals and needs when it comes to property and money. Whereas the trustee must care for the property in the trust for an extended period.
What are the different types of trusts?
Now that we have walked through the different parts of a trust and have covered what a trust is we can go through what different types of trusts exist. As you may have assumed, different types of trusts exist for different purposes. The first type of trust that we can cover today is known as a living revocable trust. If you are the grantor of a living revocable trust then you would establish this kind of trust while you are still alive and can change the terms of the trust at any time. Additionally, in a living revocable trust not only would you act as the grantor but typically you would also serve as the trustee. You would be funding the trust and managing the assets in the trust during your lifetime.
A second trustee, known as a successor trustee, would have to be named to take over the trust after you pass away or become incapacitated. One of the main reasons people create trusts is to protect the property and the trust from taxes and creditors. However, because you are still alive and are actively participating in the management of the property creditors can still get access to the property and taxes are still a part of ownership. Because you would be managing those assets as a trustee you can still earn income off the assets from investments. Therefore, this interest earned on investments would need to have taxes paid on it.
Another type of trust that you could create is known as an irrevocable trust. This is a trust that cannot be changed or revoked after its creation. You as the grantor would no longer own any of the assets once they are placed into this type of trust. However, as we just saw because you are giving up ownership of the property in the trust you would also be able to have protections on that property from taxes and creditors.
Do you have a person in your life who has a special need?
Many of us have a family member or close friend whom we would like to support financially due to that person having a special need like a physical or mental disability. One of the benefits of creating a special needs trust is that you can create a plan for caring for this person and ensuring that that person has a basic level of income and assets that can be utilized, invested in, sold, or otherwise maintained to make sure that he or she can subsist moving forward. At the same time, creating a special needs trust does not put that person in jeopardy of losing their eligibility for government benefits. The reason is that the property contained in the trust does not count towards any sort of income calculations for government benefits like Medicaid. Whereas Medicaid usually has an income and asset limit for people to qualify for this benefit, the property within a trust does not count toward these calculations.
Why should you want to create a trust?
Many people going through the estate planning process will attempt to create a trust to avoid having to go through probate at all. Probate is a situation where if you were to die without a will then your family would need to put all your property through probate so that a probate court judge can review the circumstances of their passing and then ultimately decide how property should be distributed based on the laws of intestacy. Dying intestate means that you have died without a will. In that case, the law would be unaware of any of your wishes as far as how your property will be divided and instead would simply divide property based on the law. This means that your immediate family would stand to inherit most property from you whether that is how you want your property to be divided or not. The trust not only states how property should be distributed that is contained within the trust but also makes it so that probate does not become a part of your estate matters after you pass away.
A trust allows you to have control over your assets while you are alive, and you can also determine when and how those assets should be distributed to beneficiaries after you pass away. Let’s take a situation involving your son or daughter and let’s further assume that he or she isn’t all that good at handling money. It was never a strong suit of theirs growing up and now that he or she is an adult the situation is still one where they cannot it seemed to get a handle on their finances no matter how much you work with them or no matter what sort of bad effects come about because of their poor money management.
Despite your child not being very adept at handling money you may still want him or her to be able to inherit property from your trust once you pass away. However, the thought of leaving him or her a lump sum doesn’t sit well with you. In a way, you would be enabling your child’s bad behavior and would be putting power into their hands that would potentially severely harm him or her. What you can do with a trust is to include instructions for a trustee to be able to distribute money over a specific period to your child. You may even want to include additional restrictions like forcing your child to undergo some sort of long-term budgeting with a financial coach to receive a specific amount of money. The trustee could ensure that these steps were followed before handing out property as contained in the trust.
Depending upon your situation you may not want any element of your estate planning to become public knowledge. The reality is that when a will goes through probate it becomes a public document so that beneficiaries under the will, creditors, and anyone else who may have a claim against your estate can be made aware of the estate being probated. On the other hand, if you would prefer for your estate planning details to remain private then you can create a trust which does not need to be made public. The trustee could divide and distribute property according to the terms of the trust without ever causing the public to know what is happening or what sort of property is even contained in the trust.
What is better: a trust or a will?
The two most widely utilized vehicles for estate planning are either the trust or a will. While there are differences between the two there are many similarities, as well. Whether you are creating a trust or a will, the result looks to be the same. Assets will be transferred to a beneficiary upon the death of the person who created the document. However, this is where the similarities between a will and the trust come to an end. A will has to go through probate whereas a trust does not. If you are concerned with your beneficiary or beneficiaries not receiving property fast enough under a will then you may want to create a trust instead.
On the other hand, the tricky part about creating a trust is that once the property is placed into the trust ownership of the property goes to a trustee. This means that you would no longer be the owner of the property and it would need to be retitled in that case. Any asset that you own as a donor that does not get placed in the trust would then have to go through a probate after you pass away.
What is a pour-over will?
The pour-over will work in combination with a living revocable trust to make sure that once you pass away any assets in your estate which you did not already place into a trust will be poured into that trust. Let’s walk through a situation to better illustrate this point. It would be reasonable to expect that after you created a trust you may have come to own certain amounts of property which you did not place into the trust. Or, you may have some piece of property that you neglected to place into the trust even though you would have liked to.
Here is how a pour-over-will can take care of those assets after you pass away. Simply put, a pour-over will redirect those assets into the trust after you pass away. This does not stop those assets from needing to go through probate first, but they eventually would end up in the trust and could be distributed according to the terms of that trust. An executor of the pour-over will be the trustee of your trust.
There is a fair amount of planning and forethought that would need to go into this entire process. It is easy to make mistakes during this process since there are so many moving pieces in play. Therefore, you could stand to benefit from working with an experienced estate planning attorney while you plan your estate and determine how you want your assets to be handled after you pass away. Ultimately, you are not the person who would stand to benefit from this type of estate planning. It is your family that would stand to either benefit or be harmed by the legacy that you have left.
Beginning the process of planning your estate can seem daunting at first. If you have never gone through any of these exercises before you may not know what to expect. On top of that, you may have questions that no one in your immediate circle of friends or family can answer. Going online to learn as much about the process is a good idea but your journey aimed at collecting knowledge should not stop there.
Instead, consider contacting the Law Office of Bryan Fagan today. Our experienced estate planning attorneys know what it takes to help you and your family plan. We can assist you in considering all the different options and avenues and we’ll help you select the best choice for you and your family now and into the future. With so much at stake in your estate planning journey you do not want to leave anything to chance. Working with our law office and going through the videos on our YouTube channel can help you begin to learn what it is you need to start thinking about and how you can structure your estate planning to meet whatever goals you have for yourself and your family.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultation six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas estate planning as well as how your family may be impacted by the filing of a probate case.