Trusts Questions

What is a Trust?
A Trust is a fiduciary relationship between your agent and your beneficiary over a piece of property. Essentially, it is a “contract” between 3 parties: (1) the original property owner who creates the trust, i.e., the grantor/settlor/trustor, (2) the legal owner charged with the duties, i.e., the trustee, and (3) the parties to benefit from the relationship between the grantor and the trustee, i.e., the beneficiaries

Why do a Trust?
Generally, trust is set up to avoid certain taxes and to avoid probate. However, in Texas, unless you have a sizeable estate that might result in negative tax consequences, you do not need to have a trust to dispose of your assets.

When is it a good idea to set up a trust?
It is a good idea to set up a trust in the following circumstances:
(1) When your estate is so large that after your death, the administration of your estate would result in a taxable event. In this instance, you need to consult a financial planner and an attorney to discuss the taxable consequences of your estate.
(2) When you want to protection your heirs from themselves because of their inability to manage wealth or because they are disabled or incompetent. You may also want to protect your estate from certain creditors or people who may turn out to predators to your wealth.

How do I know that my trustee will do as I direct in the trust?
The person you appoint as your trustee must be someone you trust implicitly and when the person becomes a trustee, this individual has a fiduciary relationship with you. In other words, the trustee is held to the highest standard of conduct. Many state laws frequently mandate high standards of responsibility that cannot be modified by the trust creator. In Texas, the law also governs behavior and has a long list of powers. Additionally, you may add to list of powers and rules to govern the trustee’s behavior, but you cannot take away from list.

What are some types of Trusts?
Some common examples of trusts familiar to you are: (1) your Social Security is a trust, (2) a qualified state tuition program, or (3) pension and profit-sharing plans.

What is an Inter Vivos or Living Trust?
A Living Trust is a trust that is revocable and retains little to no tax advantage because the grantor retains control of the trust during his or her lifetime to amend or revoke the trust. It is generally recommended for non-tax reasons to manage assets, possibly avoid probate, and maintain financial privacy.

What is an Irrevocable Trust?
This is a trust that cannot be revoked by a grantor once it is created. An irrevocable trust is usually created to avoid tax liabilities. The trust removes the assets from the grantor’s taxable estate. Based on trust terms, income generated by trust assets will be either taxed to the trust or to the beneficiaries of the trust

What is an example of an Irrevocable Trust?
There are several examples of irrevocable trusts, such as Long-Term Care Trust, Supplemental Needs Trusts, and “Miller” type or Special Needs Trusts.

What is a Long-Term Care Trust?
A Long-Term Care Trust provides for all trust income to be paid to grantor for life. The grantor has no right to demand the trust principal and trustee has no discretion to pay any trust principal to grantor for any reason. Any transfers will create a Medicaid penalty in the same manner as an outright asset transfer. Transfers are subject to a 60-month look-back period

What is a Supplemental Needs Trust?
A Supplemental Needs Trust is funded with assets of individual who is also the beneficiary of the trust. The individual must be disabled and be under 65. This trust may be established by a parent, grandparent, or a guardian. The trust is established using the beneficiary’s money. The state has a right of recovery against the remaining portion of the trust upon the individual’s death up to the amount of medical assistance provided.

What is a “Miller” type or Special Needs Trust?
A “Miller” type Trust is funded with assets of an individual who is also the beneficiary of the trust. The individual must be disabled and over 65 years of age. The trust may be established by a family member using the beneficiary’s money. The state has a right of recovery against the remaining portion of the trust upon the individual’s death up to amount of medical assistance provided. During the individual’s lifetime, the spouse of the individual is allowed the use of the home, a car, and living expenses

What is a Testamentary Trust?
This is a trust that is created to protect assets for and from minor, disabled and/or spendthrift beneficiaries. It could also provide for a surviving spouse who is otherwise unable to manage those assets. It could also provide for a surviving spouse while also preserving the trust assets for the ultimate benefit of the grantor’s children from a previous marriage.

What are the advantages of having a trust?
The advantages of having a trust are: the grantor may have control over the property, including after the grantor’s death; the grantor may restrict access to the property; the trust provides professional management/investment; the trust provides for responsibility and accountability; the trust may remove the property from estate taxation; the trust may qualify for tax benefits; the trust gives the grantor some flexibility, discretion, and control; the trust provides for asset protection; the trust may also allow for multiple state tax planning; and the trust gives the family the financial privacy that is not available in a will, which when probated becomes public record.

What are the disadvantages of having a trust?
The disadvantages of having a trust are: the cost of formation of the trust, which includes the cost of paying an attorney and a financial planner and a tax consultant to prepare the trust; the cost of operating the trust, which could include the trustee’s commissions, the cost of return preparation, court supervision; the loss of unrestricted access and freedom to dispose of the property; administrative inconvenience, such as notices, retitling of assets, extra checkbooks, etc.; local law requirements, such as periodic accountings, filing, waivers, etc.; and local law limitations on ownership of assets, activities, ability to sue, etc.