Living Trusts, Irrevocable Trusts, Charitable Trusts, trusts come with many different names and serve many different purposes. The root concepts involved, however, are all the same.

Trusts have been with us for a very long time.  In fact, the use of this document for living and testamentary transfers predates the will.  The concept of the trust was brought to Great Britain from the crusades in order to avoid taxes and to control property.  From Great Britain, Trusts were brought to this county for the same reason that the British had been using it. Yes, our ancestors enjoyed the same problem we have – taxes.

A Trust is a Bucket: One of the simplest analogies to a trust is to think of it as a bucket.  In a real sense, a trust is a form of a bucket. It is a place where you carry things.  Buckets are designed to carry things.  You buy a bucket from a store, you take it home, you put water, milk, or garden tools in it.  It doesn’t matter what you put in the bucket, the bucket is designed to hold things.  It is the same with a trust.  A trust is a device where assets are placed in it for their protection and management.  Like carrying a bucket around with you, the trust is managed by you or someone you designate – the “Trustee.”  

If you prefer, another way of thinking about a trust is to think about corporations. We all know that a corporation is a creature of law. It is a legal fiction for the management of a business or the investment of funds.  It has all of the rights and duties of the individual except that it cannot vote.  The Living Trust is similar.  It too is a legal fiction for the management/investment of assets. Where a corporation is controlled by a CEO, the Living Trust is controlled by a “Trustee.”

Trustor/Grantor/Settlor: The person or person’s who creates the trust is called either the Trustor, the Grantor or the Settlor.  It does not matter which term is used, the terms Trustor, Grantor, Settlor all mean the same. They are used interchangeably. Here we will use the term Grantor.

Trustee: The person who manages the trust assets is called the Trustee.  A trust may have more than one Trustee.  The Trustee can be the Grantor, a friend or relative, or a business entity such as a bank. You, as Grantor, would choose who the trustee will be.  A Trustee is charged with a number of duties with regards to the management of the trust. First, a Trustee owes a fiduciary duty to the beneficiaries.  This means that the Trustee must act prudently with regards to investment of trust property.  It also means that the beneficiaries can sue the Trustee for breach of his or her fiduciary duty.  

Beneficiaries:  The beneficiaries of the trust are those who would enjoy the income or principal of the trust for their benefit.  Usually, the first beneficiary of a trust is the Grantor.  The secondary beneficiaries are those who would take upon the passing of the last Grantor to die.  As Beneficiary, you receive all the benefits of your Trust during your lifetime.  After your death, your designated heirs become the beneficiaries of your Trust.

Revocable Trust:  The Revocable Living Trust in recent years has become one of the most popular estate planning tools. It is both an efficient way to control and manage your assets during your lifetime and it is an invaluable tool for the distribution of assets upon death to your designated beneficiaries. The term “Revocable” means just that.  While you are alive, you may revoke the trust at any time for whatever reason.  You can take the assets out of the trust and re-title them in your name. You can alter, amend or cancel the terms of the Trust at any time.  You can also move assets into and out of the Trust until incapacity or death. In Texas, all Trusts are presumed revocable unless stated otherwise in the trust document.

Living: The term living, also known as intervivos, means that the trust was created while you were alive.  Compare this to a “Testamentary Trust” which is created by will and comes into being upon your death.

Grantor, Trustee, and Beneficiary Same: With a Revocable Living Trust, the Grantor, Trustee and Beneficiary may all be the same person. You, as the creator of the trust (Grantor), manages trust assets (Trustee) for your benefit (Beneficiary).  Using the corporation example above, you are the incorporator, stockholder, and CEO. Or if you prefer, you are carrying your own bucket with the Revocable Living Trust.  Note: this does not hold true for an Irrevocable Living Trust.

Trusts have both benefits and detriments, consider the following:

Taxes: A properly drawn trust will reduce inheritance taxes. Traditionally, a will left a spouse’s entire estate to the other spouse.  This is not a taxable event due to the unlimited marital deduction.  However, as discussed under "Taxes," this creates a loss of $650,000.00 in tax exemptions. The Revocable Living Trust can solve this problem by incorporating by-pass terminology into it. In other words, the trust becomes what is commonly called an A-B trust or QTIP trust. 

By using the A-B Trust formula the $650,000.00 tax equivalent exemptions as to both spouses are still in place and have the benefit of the property and income from the entire trust estate.  An A-B Trust is having your cake and eating it too.

You still own it: Placing assets in a Revocable Living Trust does not remove your control of those assets.  Your are still able to buy property, move property, own and manage the property, and/or rent the property just like you did before.  The only difference is that you are now doing business in the name of the trust. This is not true for the Irrevocable Trust. Even from an income tax standpoint, it's business as usual.  You continue to fill out your Form 1040 as before. While both spouses are alive, the Trust does not require a Tax ID number or the filing of additional tax returns. This is not true for irrevocable trusts.

Privacy: The distribution of assets by trust is a private process which does not require public record.  When you probate a will an inventory must be filed with the court.  This is a public document.  We once caused a certain amount of anxiety on the part of an opposing party to a lawsuit because I was able to determine exactly what his inheritance was from the public record.

Time: Since testamentary property is already titled and held by the Trust, the conveyance of that property to heirs is simply a matter of drafting the appropriate documents.  This can usually be done in short order.

Probate: Since property held by trust is controlled by the trust instrument, the passage of assets by trust is completely outside of the probate process. Probate is court supervised process to legally recognize the Will and to transfer title of the assets to the heirs.  Probate can be a financial and administrative burden, particularly with a large, complicated estate. Recognize, however, that Probate avoidance alone is not a sufficient reason to execute a trust.

Ancillary Probate:  Assets owned in other states have to pass through the probate process in those states.  Your Trust can hold title to assets owned in other states so that ancillary probates can also be avoided.  For those states which require the payment of Probate Taxes or Inheritance Taxes, the Revocable Living Trust is a significant tax savings tool. For example, if you owned property in New Mexico, Colorado, or wherever, then that property will have to be probated in the state in which it resides.

Incapacity/Guardianship: A Living Trust will avoid guardianship proceedings. Due to advances in medical science, advanced age dieses are becoming more and more prevalent in our society.  Thus, Guardianship proceedings are becoming more and more common. A Guardianship is a form of probate process where the court designates someone to be charged with the care and custody of the incapacitated adult. It is an emotionally charged process that can be both frustrating and expensive. 

By using a living trust and ancillary documents, you can choose your guardian as opposed to the court.  For example, the Revocable Living Trust may appoint the healthy spouse to act as Trustee such that financial control of family assets are maintained until either the incapacitated spouse recovers or passes away. In addition, the trust can appoint another family member to succeed the incapacitated spouse.

Organization: A properly funded trust causes the Grantor to gather his or her effects into one place and account for same. Thus, all assets are already accounted for and ready for distribution at the Grantor's death.

Portable: Each state has its own laws with regards to wills and probate. Should you decide to move to another state, the trust will remain in effect and force will be given to its provisions in the new state.  Caveat: when moving to another jurisdiction, always have your estate planning documents reviewed by a competent estate planning attorney.

Trusts Not: Not every person needs a trust. If your estate is small consisting only of a house, cars and a few bank accounts, you really do not need a trust. A simple will drafted in conjunction with a Statutory Durable Power of Attorney, Health Care Power of Attorney, and Directive to Physician is all that is really needed. However, if your estate is greater than 5 or 600,000.00 then you should probably consider a trust.

Warning: Trust Mills and Brokerage Firms

There are a ton of Trust Mills and financial services companies out there selling trusts to everyone that walks in the door. The Texas Bar Association has issued a pamphlet warning the public about these services. The trust mills and brokerage firms are preying upon your insecurity. The facts are a lot of people have become convinced that they need a trust because they have heard or read about probate nightmares. Trust mills and brokerage firms are taking advantage of this in order to sell you a product or to make money off of you. 

The scheme is to sell you a trust for not very much money at all - a discount due to business volume.  After you have bought the trust and placed your faith in the financial consultant, they will then try to sell you an additional product. This is where they make their money. In the alternative, a brokerage house may sell you an estate package so that you will name them as trustee or subsequent trustee. In this manner, they will get to manage the trust estate for a “fee” and/or get to “churn” your investments for commissions. All of this is done without regard to your particular estate planning needs.

There are two reasons that trust mills are successful. First, as already mentioned, they are playing upon your fears. Some will say anything in order to get you to buy – it is part of being a “salesman.” Secondly, the Depression Generation got wealthy by watching their money closely. They scrimped and saved. They bought everything on sale. By selling you a trust at the “sale price,” the good deal, they get seniors to buy the packages. The amazing thing about this is a senior, who has scrimped and saved their entire life, is now looking for a discount on testamentary instruments. The very documents which will control the management and distribution of his or her hard earned assets.

It would not be fair to some “discount” practitioners to proceed without stating that there are a number of lawyers who are producing excellent estate planning documents at discounted prices.