By Kristi Burleigh
Attorney at Law
The following is provided for informational purposes only and is not, nor should it be construed as legal advice.
A trust is a contract between a grantor, (creator of the trust), and a trustee that allows the trustee to hold and manage assets on behalf of a beneficiary. It is memorialized in writing by a trust agreement that spells out the rules of the fiduciary arrangement. A trust is not an entity similar to a corporation; it is a fiduciary relationship. A grantor, (also called a settlor or trustor), trustee, and beneficiary are all necessary parties to a trust. One person can be the grantor, trustee, AND beneficiary, or these positions can be filled by different people.
Trusts are typically broken into two different categories: revocable and irrevocable. A revocable, or inter vivos, trust can be revoked or amended during the grantor’s lifetime by the grantor. An irrevocable trust, on the other hand, cannot be modified or revoked. Oftentimes, a revocable trust will become irrevocable upon the grantor’s death. An irrevocable trust is similar to a gift, in that, once the property is transferred into the trust, it cannot be taken back.
Because property in a revocable trust, (sometimes called a living trust), can be taken in and out of the trust at the direction of the trustee, there are no transfer consequences, such as gift tax consequences or considerations by Medicaid’s look-back period. However, a person cannot create a trust for the benefit of themselves to avoid creditors or estate taxes, because property in a revocable living trust is still considered a part of that person’s estate.
So what are the benefits of setting up a trust?
- Wealth and property management – the grantor can name successor trustee(s) to manage the grantor’s property should the grantor become incapacitated. A trust can also designate how the trust property is to be distributed upon the grantor’s death.
- Protection of your legacy – as long as the trust contains certain protection provisions, property placed in an irrevocable trust for the benefit of your heirs ordinarily cannot be seized by their creditors. Therefore, trust property is generally protected for future generations.
- Avoiding probate – all trust assets are distributed pursuant to the trust document and do not require probate, or the issuance of Letters Testamentary, for distribution. Every so often, a grantor fails to transfer ALL of his or her property into the trust. In that case, all property outside of the trust is a part of his or her probate estate, and probate will be necessary.
- Avoiding ancillary probate – If the grantor owns property located in another state, the trustee can manage and transfer that property after the grantor’s death without the necessity of an ancillary probate in that state.
Other specific types of trusts include, special needs trusts, irrevocable life insurance trusts, grantor retained annuity trusts, charitable remainder trusts, generation-skipping trusts, qualified terminable interest property trust, (QTIP), marital and bypass trusts, and many more. Depending on the client’s goals, there is inevitably a trust that can reach those goals. But not all trusts are created equally. As with all estate planning tools, you should consult an attorney for advice on and preparation of documents specific to your situation.
© 2018 Kristi Burleigh
Kristi Burleigh is a 2009 graduate of South Texas College of Law. She concentrates her practice in the areas of estate planning, wills, trusts, probate, and real estate law. Ms. Burleigh is an associate with Currin, Wuest, Mielke, Paul & Knapp, PLLC (“CWMPK”) at Three Kingwood Place, 800 Rockmead Dr., Suite 220, Kingwood, Texas 77339. Besides the areas in which Ms. Burleigh practices, other attorneys at CWMPK concentrate their practice in areas of family law (including divorce and custody issues), bankruptcy, litigation, employment law, business operations and formation, and construction law. For more information, please call 281.359.0100 or see the CWMPK website at www.cwmpk.com.