Trusts

What Is A Trust?

A trust is a written agreement (the “Trust Agreement”) between the person creating the trust (the “Trustor” or “Grantor”) and the person who will take possession of the assets to be placed in the trust (the “Trustee”) for the benefit and on behalf of the Trustor or someone that the Trustor designates (the “Beneficiary (ies)”). The Trustee is charged with preserving and managing the assets he or she is taking possession of according to the terms of the Trust Agreement.

Should I Utilize A Trust In My Estate Planning Process?

Whether a person should use a trust depends on their particular circumstances, the goals they seek to accomplish by creating a trust, and should be considered in light of an overall estate planning process.

What Types of Trusts Exist?

There are many different types of trusts that could apply to any given situation; however, following are the most common types of trusts:

Revocable Living Trust also known as the Living Trust

The Revocable Living Trust is created by the Trustor, during his or her lifetime, and allows him or her to manage the assets that are in the trust during his or her life time, and upon his or her passing, the assets are distributed by the Trustee according to the terms of the Trust Agreement. The Revocable Living Trust is used in some instances in place of a will, as all assets of the Trustor are transferred into the name of the trust and distributed according to its terms, thus avoiding the probate process completely. In order for the use of the trust to truly be beneficial, every single asset of the Trustor must be transferred before the passing of the Trustor; if not, any assets that have not been transferred will have to be distributed through the probate process.

The benefit of the use of the Revocable Living Trust in Texas is debatable because our probate process is easy to navigate, but can be very useful for people who own property in other states. Please consult an attorney to discuss this matter in greater detail as it relates to your circumstances. We are available to discuss this matter with current and potential clients.

Testamentary Trusts

Testamentary trusts are created under a person’s will as part of its terms, and are usually created to manage assets of young children or minors who might otherwise come into ownership of the assets upon the Testator’s death until they reach an age by which the Testator believes that the child or minor will be mature enough to take possession of and manage the assets that are in the trust. The testamentary trust does not become effective until after the Trustor’s death and the validation of the will through the probate process, so the assets to be transferred to this trust are not transferred until after the will has been through the probate process.

Educational Trusts

Educational trusts are created during the lifetime of a parent or other person for the benefit of a minor child. The assets in the educational trust may only be distributed to pay for private elementary or secondary school, college, or graduate school, or for any other educational pursuits the Trustor may deem advisable. Persons creating an educational trust may avoid the gift tax by contributing the then current gift tax exemption amount once a year to the trust. The educational trust must also qualify as a Crummey Trust, as defined below.

Crummey Trust

Based on the U.S. Supreme Court case Crummey v. Commissioner, the Crummey Trust requires that the beneficiary (ies) of the trust be allowed a certain period of time to make withdrawals from the trust after the gift is received by the trust. If the beneficiaries do not withdraw the gift during this time, then the gift will remain in the trust, and be governed by its terms. The Trustor is required to send withdrawal letters to the Beneficiary (ies) as soon as the gift has been made.*

Spendthrift Provisions in Trusts

Spendthrift provisions are included in trusts to prevent the beneficiary (ies) of a trust from requiring that trust assets be used to satisfy debts owed by the beneficiaries. These provisions protect the assets in the trust, and should be considered for inclusion in all Trust Agreements.

*The gift tax and the gift tax exclusion may be used in creative ways to avoid payment of the gift tax by the Trustor. Please consult with an attorney or certified public accountant to discuss this tax advantage. We at The Guess Firm are available to discuss these matters with current and potential clients.