A trust is a relationship among three parties: (1) a trustee; (2) trust beneficiaries; and (3) a trust settlor. A trustee is appointed in a trust agreement to manage property for the benefit of beneficiaries subject to the terms of a trust agreement and executed by a trust settlor. A trust is extremely flexible in its terms, and it allows the trust settlor to govern how his or her property will be managed during life and following death. Trusts are initially either revocable or irrevocable; however, a revocable trust may become irrevocable after the occurrence of a specific event, such as the death of the trust settlor. The primary benefits of forming a revocable trust include the following:
Management of Trust Property;
Liability Protection; and
- Probate Avoidance and Privacy.
Management of Trust Property
A trust is an ideal vehicle to manage property during life and following death. While living, the trust settlor may fully enjoy any property placed in a revocable trust and may even serve as his or her own trustee. During that period of revocability, the trust settlor, acting as his own trustee, can distribute property for his or her own benefit or even revoke the trust entirely and reclaim the assets. Alternatively, the trust settlor may appoint someone else as trustee to manage property for his or her benefit; such an appointment can be especially helpful in the event that the trust settlor becomes unable to make his or her own decisions.
Upon the death of the trust settlor, the trust becomes irrevocable, and the then-serving trustee carries out the trust terms on behalf of the trust settlor. A trust allows a trust settlor to protect beneficiaries who are minors or otherwise unable to handle an inheritance on their own. By placing restrictions on trust distributions and placing assets under the care of a trustee, the trust settlor ensures that the trust assets are a benefit rather than a burden. And, distribution guidelines may be applied on a per-beneficiary basis; a trust may state that some children will receive all of their property outright at certain ages while other beneficiary’s assets remain in trust for a longer period. In the case of blended families, a trust helps minimize conflicts over the trust settlor’s property between a second spouse and children from an earlier marriage. Scott will ensure that your trust’s provisions are tailored to help you realize each of your specific goals.
Assets received by a beneficiary through a trust enjoy liability protections not afforded to assets inherited outright. If managed properly, trust assets will be not be subject to judgment creditors of the beneficiary or divorcing spouses. Importantly, a trust settlor does not personally enjoy such liability protection with respect to assets placed in trust; however, all beneficiaries of the trust do receive such protection upon the trust becoming irrevocable. Thus, a trust settlor may pass along not only the benefits of the assets themselves, but also liability protection by utilizing a trust as an estate planning tool. To maintain such liability protection, the trustee must carefully follow certain procedures that Scott will outline.
Probate Avoidance and Privacy
In addition to providing for a smooth transfer of wealth and liability protections, a trust, unlike a will, avoids ancillary probate for land and mineral interests owned by the decedent. Ancillary probate (also known as out of state probate) is necessary when a person owns land or mineral interests in another state and would like to transfer such property to heirs. For example, a Texas resident who owns mineral interests in Louisiana (or any other state) may not pass such assets solely by his or her will, because the second state does not recognize the probate process of the decedent’s state. To transfer ownership of the out of state assets to the heirs of the estate, the executor will need to hire an attorney in the second state and go through the probate process of that state. In other words, an entirely different probate process and an additional attorney are required to transfer the out of state assets. Such a process can quickly become both time-consuming and costly. Fortunately, any assets placed in a trust, even out of state assets, avoid ancillary probate.
Every person’s will that is filed for probate becomes subject to public inspection. This disclosure process is designed to inform potential beneficiaries and creditors of their rights under the deceased’s will. However, some individuals would prefer to not publicly disclose their plan for disposing of their assets. A trust maximizes your privacy because trusts are not subject to public inspection, and you may draft a will that “pours over” all of your assets into a trust. The end result is that your publicly available will only indicates that your assets pass to a trust; the trust agreement itself is not publicly disclosed. Then, only persons who are trustees, beneficiaries, or authorized third parties will be apprised of the trust terms.
Funding a Trust
A trust may be funded during your lifetime or upon your death. To avoid the cost and hassle of another state’s probate process, Scott recommends that any real property, such as land or mineral interests, that you own out of state be placed in your trust during your lifetime. Intangible assets, such as stock and bond investments and real property owned in your home state may be placed in your trust while you are living or through provisions of your will. Scott can discuss with you the benefits and costs to transferring such property to the trust during your lifetime.
A revocable trust established by a trust settlor who pays all of the tax liability, if any, on the assets placed in trust need not file an additional tax return. The trust is considered a disregarded entity for tax purposes, and the trust settlor will include any income or gains realized from the trust property on his or her individual income tax return. As both an attorney and CPA, Scott can advise you how the legal and tax aspects of your revocable trust will work together.
Although forming a trust is more expensive than a drafting simple will, many clients find that the benefits afforded by a trust outweigh the incremental cost. Does a trust make sense for you? Contact Scott today to setup your free initial consultation. After discussing your estate planning goals, he will provide you with a fee estimate of what your revocable trust will cost.