Before we explore the five essential elements needed to create a trust, let’s first clarify what a trust is. A trust is a legal relationship involving three parties concerning property. The trustor, also known as the donor, is the individual who transfers property into the trust. The trustee is the person who holds ownership or legal title to that property and is responsible for managing it according to the trust’s instructions. Finally, the beneficiary is the person who benefits from the trust property. Understanding these roles is crucial when considering how do you create a trust effectively.
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 the money and rent out the farm. He designates all investment income and rent to be paid to Samantha for her lifetime. Upon Samantha’s death, any remaining property in the trust, including the farm, will transfer 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 the life beneficiary of the trust, as she holds an interest in the property for her lifetime. 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.
Establishing Intent and Beneficiaries in Trust Creation
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.
Trustee Duties and Conflicts of Interest
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’ve explored the components of a trust and its definition, let’s examine the various types of trusts available. Different trusts serve different purposes. The first type we’ll discuss is the living revocable trust. As the grantor, you establish this trust while alive, retaining the ability to change its terms at any time. Typically, you also act as the trustee, funding and managing the trust’s assets 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.
You can also create an irrevocable trust, which cannot be changed or revoked after its establishment. Once you place assets into this type of trust, you as the grantor no longer own those assets. 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 benefit of creating a special needs trust is that it allows you to develop a plan for caring for the individual while ensuring they have a basic level of income and assets. This trust enables the funds to be utilized, invested, sold, or maintained to support their ongoing needs and well-being.
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 occurs when you die without a will, requiring your family to submit your property to probate court. A judge will review the circumstances of your passing and decide how to distribute your assets according to intestacy laws. Dying intestate means that the law will not recognize your wishes regarding property division; instead, it will allocate your assets based on legal standards. Consequently, your immediate family will likely inherit most of your property, regardless of your intentions.
Benefits of Creating a Trust
Creating a trust lets you specify how your property will be distributed, which eliminates the need for probate in your estate matters. With a trust, you maintain control over your assets during your lifetime and decide when and how to pass those assets on to your beneficiaries after your death.
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.
Inheriting Through a Trust
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 can ensure that these steps are followed before distributing the property outlined in the trust.
Depending upon your situation you may not want any element of your estate planning to become public knowledge. When a will goes through probate, it becomes a public document, allowing beneficiaries, creditors, and anyone with a claim against your estate to access information about the probate process. If you prefer to keep your estate planning details private, you can create a trust that does not require public disclosure. The trustee can then divide and distribute property according to the trust’s terms without revealing any information to the public about the trust’s contents or activities.
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.
Creating a trust comes with its challenges. Once you place property into the trust, ownership transfers to the trustee, meaning you no longer own the property. In this case, you must retitle the property. Any asset you own that remains outside the trust will go through probate after your passing.
What is a pour-over will?
The pour-over will works in conjunction with a living revocable trust to ensure that any assets in your estate not already placed into the trust will automatically transfer into the trust upon your passing. 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. While this process doesn’t prevent those assets from going through probate first, they will eventually transfer into the trust and be distributed according to its terms. 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 can benefit from working with an experienced estate planning attorney as you plan your estate and decide how to handle your assets after your passing. Ultimately, you won’t be the one to benefit from this estate planning; your family will either gain or suffer from the legacy you leave behind.
Conclusion
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.
Understanding how do you create a trust involves grasping the essential elements of this legal arrangement. Clearly defining the roles of the trustor, trustee, and beneficiary ensures that individuals manage and distribute their assets according to their wishes. It’s crucial to consider factors such as the purpose of the trust, the type of assets involved, and the specific instructions that will guide the trustee. With careful planning and the right legal guidance, establishing a trust can provide peace of mind, protect your legacy, and offer financial security for your loved ones.
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 help you learn more about Texas estate planning and understand how filing a probate case may impact your family.
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Bryan Fagan, a native of Atascocita, Texas, is a dedicated family law attorney inspired by John Grisham’s “The Pelican Brief.” He is the first lawyer in his family, which includes two adopted brothers. Bryan’s commitment to family is personal and professional; he cared for his grandmother with Alzheimer’s while completing his degree and attended the South Texas College of Law at night.
Married with three children, Bryan’s personal experiences enrich his understanding of family dynamics, which is central to his legal practice. He specializes in family law, offering innovative and efficient legal services. A certified member of the College of the State Bar of Texas, Bryan is part of an elite group of legal professionals committed to ongoing education and high-level expertise.
His legal practice covers divorce, custody disputes, property disputes, adoption, paternity, and mediation. Bryan is also experienced in drafting marital property agreements. He leads a team dedicated to complex family law cases and protecting families from false CPS allegations.
Based in Houston, Bryan is active in the Houston Family Law Sector of the Houston Bar Association and various family law groups in Texas. His deep understanding of family values and his professional dedication make him a compassionate advocate for families navigating Texas family law.
