TRUST BASICS
By
Stuart Ian Levin
© 2016 by Stuart Ian Levin
All Rights Reserved
Trusts have been called one of the most significant legal inventions of all times. Trusts are used widely and affect your everyday life. When you obtain a home mortgage in Texas, this is almost always done under a Deed of Trust. When you set up a bank account for a minor, you are creating a form of trust. Lawyers often recommend to clients that they use some form of trust as a part of estate planning.
So, what is going on in a trust? All trusts separate the ownership of an asset (any asset including real estate, cash, and investments) into two classes. One class, the legal owner or “trustee” owns the title to the asset. The Trustee is the only one who can sell, transfer, or legally destroy the asset. The second class of owner is the beneficiary. The beneficiary has the right to use or enjoy the asset, subject to restrictions imposed by law or under the document that creates the trust. In addition, there are circumstances when the law imposes a trust such as where a person leaves an asset to a minor without setting up an express trust.
In commerce, for example, trusts are often used to escrow funds as a part of a business deal or as a means of acquiring assets that are to be managed by a trustee for the benefit of a group. Since the trustee is the legal owner of the underlying asset(s), liability usually rests on the trustee, unless the beneficiary has been shown to be negligent or the trust agreement (sometimes called a trust indenture) apportions liability to the beneficiary. In this sense, trusts are not a substitute for a limited liability entity such as a corporation or limited liability company.
Trusts are used extensively in estate planning. Here are some common estate planning devices that employ trusts:
- Trusts for Children. These are set up to manage assets and distributions for children until they reach a specified age (this need not be eighteen). While assets are in trust, the trustee is responsible for investments and for making distributions to the child. Funds are rarely “lock boxed” and are available to the child under certain circumstances. The usual standard set (which complies with I.R.S. criteria) is “health, education, support, or maintenance.” Thus, if money is set aside for child by deceased parents and the child needs a car, the trustee may pay for the car. However, the trustee’s authority and responsibilities are regulated by law. Thus, the trustee might approve a mid priced car for the child, but probably would not approve the purchase of a luxury sports car.
- Disability Trusts. These are set up to provide for health, education, support, or maintenance in the event of disability or incapacity. Such trusts provide for the management of assets for oneself, a spouse, parents, or disabled children. Trusts for disabled or incapacitated children often are drafted to maximize government benefits that might also be available or provide for other special requirements. Such trusts are generally called, “Special Needs Trusts.”
- Tax Planning Trusts. There are a variety of trusts that are used to minimize the possible effect of federal estate taxes (Texas currently has no state “death tax”). These include QTIP trusts (i.e. marital deduction trusts), QDOT trusts (used for non U.S. citizens to obtain tax advantages somewhat comparable to U.S. citizens), and various forms of trusts giving present income and/or remainder distribution of asses to a charity.
The world of trusts is vast and no brief article can address all of the specific trusts available or their application to particular circumstances Legal assistance should be obtained from a qualified lawyer before contemplating any type of trust.
Here are a few additional considerations that should be noted:
- All good things must come to an end. Except for charitable trusts and trusts that may benefit the government, there are complex laws called the, “Rule Against Perpetuities” that govern how long a trust may exist. This is a serious matter because if the maker of the trust (called the “grantor” or “trustor”) violates the Rule Against Perpetuities, the entire trust is void.
- Ability to Amend. In general trusts may be revocable (that is able to be changed, amended, or revoked) or irrevocable (not able to be changed or revoked. In addition there are different tax consequences and reporting required to the beneficiaries that apply to each type of trust.
- Fiduciary Duties. Trustees are under the very highest form of duty owed to others, sometimes called “fiduciary duties.” These are set by law, including under the Texas Trust Code and/or under the documents that create the trust. Your choice of trustee(s), may include relatives, friends, and /or corporate fiduciaries (including banks and trust companies) is extremely The decision to accept responsibilities by acting as a trustee are not to be taken lightly and the trustee should proceed to act with proper legal advice.
- I Since trusts involve significant legal matters and are legally “technical” documents subject to a vast body of law and regulation, they should be professionally drafted. Trusts created as a part of a will (i.e. “testamentary trusts”) are subject to further oversight by a county or probate court. Trusts created outside of a will (so called “living trusts”) are generally not subject to direct court supervision. This is why most lawyers counsel clients to create trusts outside of their wills.
Trusts are neither scary nor mysterious, but properly used, can achieve great results in appropriate circumstances if properly drafted and implemented. Questions concerning the creation of or administration of trusts should be referred to qualified counsel.