Trust Formation and Trustee Representation
What exactly is a trust? What does it entail? How can a trust help me accomplish my estate planning goals?
These are questions that people commonly ask when they are concerned about planning out their future and providing future security for both themselves and their loved-ones. In short, a trust is a type of legal arrangement by which a person can 1) hold property or 2) give property to a loved one, a charitable organization or anyone to whom he or she wishes. Depending on the circumstances, a trust can be an effective tool that individuals can use to achieve their estate planning goals. The type of property that can be held “in trust” is not limited to real estate, but can include money, cars, stocks and bonds, or just about any type of property.
The person who creates a trust is generally called “the grantor” or “the settlor”. Instead of owning property outright, when one transfers property to a trust, they are splitting ownership of the property into what is called legal title and beneficiary title. When a person owns property outright, he or she owns both the legal and beneficiary title. However, to create a trust means to give the legal title to one person called “the trustee” and the beneficiary title to another person called, well, “the beneficiary”.
The grantor has a lot flexibility when it comes deciding what rights and responsibilities all three parties will have. If the grantor chooses to retain the power to revoke or cancel the trust, then this is what is called a “revocable” or “living” trust. If the grantor chooses to not retain any powers over the property after he or she creates the trust, then this is called an “irrevocable trust”. Generally when the grantor sets up the trust, the grantor and his or her attorney will create a founding document, somewhat like a contract, that is called a trust instrument. In this instrument, the grantor lays out the terms of the trust and provides instructions to the trustee about how to manage the trust. The trust instrument also lays out the rights of the beneficiary or beneficiaries. If the trustee does not abide by the terms of the trust instrument, then a beneficiary can enforce their rights by obtaining a court order that will require the trustee to carry out his or her duties.
Make a Will With a Testamentary Trust
In addition, a grantor can also set up what is called a “testamentary trust”. This is a trust that does not take effect until the grantor passes away and his or will is probated. In addition, rather than being founded by making and signing a separate document, the most common way to create a testamentary trust is for grantor to write the terms directly into his or her will. The grantor can name who they want to be trustee in their will, often, but not always, this person is the same person who is serving as personal representative of the estate. The grantor can name different persons to serve in the roles of personal representative and trustee. If the grantor prefers, just like with a non-testamentary trust, they can set up a testamentary trust in their will without naming a trustee and let the Judge select a trustee when the will is probated.
Since it is testamentary trust is by definition, created as part of a will, the property that the grantor designates to be transferred to their testamentary trust will not actually be transferred during their lifetime. As a result, the property will have go through probate in order to formally launch the trust and appoint the trustee. This is in stark contrast to non-testamentary trusts because a non-testamentary trust is established while the grantor is alive. Therefore, the property will transferred from the grantor to the trust, which means the grantor would not own the property in their personal capacity upon their death. Rather, it will be owned by the trust.
Benefits of a Trust
Whether created during the grantor’s lifetime through a trust document or as testamentary trust in a will, a trust can provide people with a legal mechanism by which they can create a comprehensive management and distribution plan for their property. The grantor has substantial flexibility when it comes to deciding how much and how often property is distributed by the trustee to the beneficiary In addition, the grantor can specify that certain events in the life of the beneficiary, such as going to college, reaching a specific age, or even becoming disabled, are to operate as triggers upon which the trustee must distribute additional money to the beneficiary. Furthermore, the grantor has the flexibility to specify a date or event, in the founding instrument, upon which the trust is to dissolve and to whom the trustee should give the trust property when the trust property is dissolved. This remains true even if the grantor dies long before the date or event that triggered its termination.
At it heart, a trust is a legal arrangement for ownership and distribution of property, depending on the circumstances, may be helpful tool that will help accomplish one’s estate planning goals. The main result of holding a property interest in a trust, such as a beneficiary interest, as opposed to owning to same property outright, is that the law will either treat that property differently that it would if it were owned out right or will treat the grantor differently because he or she doesn’t own the property. Think about taxes as one example. Owning property in trust often provides many benefits that do not always come without outright ownership. However, under certain circumstances, a trust is less advantageous than outright ownership. Before creating a trust, it is generally a good idea to consult with a trust attorney familiar with Texas trust law, who can analyze your particular situation and provide guidance as to how the law will treat you and your property differently based on outright ownership vs. trust ownership. A few reasons individuals seeks to establish a trust is because, under the right set of circumstances, a trust can:
✧ Protect Trust Beneficiaries
Sometimes, an individual wants to leave money or other property to a loved one, but is concerned that the loved one does not have the skills to effectively manage it. One should generally avoid leaving money outright to a beneficiary if he or she doesn’t have the financial capabilities necessary to property manage or if there is a serious risk that he or she will not spend it wisely. This is where a spendthrift trust can come in handy. In addition, sometimes a grantor may wish to leave property in trust to a loved-one who is susceptible to outside influences that place the property at risk.
✧ Provide for Professional Management of Property
Sometime, individuals may create a trust and name themselves as the beneficiaries. In this case, they would be both grantor and beneficiary. This is can be ideal when the grantor owns assets that require extensive oversight in order to be managed. By transferring their property to a trust in which they name themselves as beneficiary, they still can maintain a beneficiary interest in the property while leaving the management and operations to a trustee. For example, an individual who owns a farm may want to set up a trust in which a professional trustee is brought in to manage the farm. This way, the individual does not have to sell his farm, but can continue receiving the benefits of ownership without having to actually manage it.
✧ Avoid Probate
If one chooses to set up a trust outside of their will in a separate document, then the property generally will not have to go through the probate process. If a grantor transfers their property to a trust and does not revoke the trust during their lifetime, then the property cannot be probated because the person no longer owns the property. The trust owns it. Therefore, rather than being controlled by the terms of a will, when the grantor dies, the trustee will continue to hold legal title, but will still be bound by the terms that the grantor set forth in the trust instrument. Generally, when a person creates a non-testamentary trust like this, they include a provision instructing the trustee to distribute all the trust property to a particular persons or to a charitable organization upon their death. Rather than going through probate, after the grantor/beneficiary passes away, the trust dissolves and the trustee distributes the property in accordance with the grantor’s instructions as set forth in the trust instrument.
Contact the Law Offices of Joseph E. Seiler to schedule a free one-half hour strategy session
If you live in the Northwest Harris County area including Houston, Tomball, Hempstead, Brenham, or Cypress, Texas and you are interested in creating a trust and would like to receive legal advice, then please contact the Law Offices of Joseph E. Seiler to schedule a free one-half hour strategy consultation. To schedule your free strategy session, please message us on our contact page or call us at (713) 343-1450
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