Types of Trusts
A trust is a fiduciary arrangement that can be created during an individual’s lifetime and survive beyond their death. Additionally, a trust could be originated out of a will and thus formed after someone’s death. Assets deposited into the trust belong to the trust itself, never the trustee, and those assets are subject to the various specific instructions and rules of the trust contract. Defined simply, a trust is a right in property bound into a fiduciary relationship by a party, for the welfare of another party. In this fiduciary relationship the trustee holds title to trust property, but the beneficiary is the individual who actually garners the benefits of that trust. Revocable and irrevocable trusts are the most common, though others do exist.
The Revocable Trust
Revocable trusts, sometimes referred to as living trusts as they are created during the lifetime of the trustmaker, can be altered and changed, or even rescinded. In a revocable trust the trustmaker conveys the property title to a trust, functions as the initial trustee, and maintains the right to remove the property from the trust while he or she is living. Revocable trusts are often used to avoid probate. If asset ownership is transferred to a revocable trust within the life of the trustmaker such that it is held by the trust when the trustmaker dies, the assets are not accountable to probate.
While some people may consider a revocable trust to be a secure means to avoid probate, revocable trusts should never be considered as a first line method to protect assets, because those assets that are moved into the trust during the trustmaker’s lifetime are fair game for any creditors that may come forward. Even though a creditor would have to request a court order to tap into the trust’s assets, it can be done. After the death of the trustmaker, a revocable trust becomes an irrevocable trust.
The Irrevocable Trust
Irrevocable trusts, once created, cannot be changed, altered, modified, or rescinded. As such, anyone considering an irrevocable trust formation should be aware that any and all property that is moved into it will remain there, and cannot be removed by anyone, trustmaker included. An individual could elect to procure survivorship life insurance as its benefits can certainly be held in irrevocable trust. Some may opt to use it for estate tax planning with large estates, but caution is warranted as life insurance wrapped into an irrevocable trust can sometimes have a deleterious impact. These types of trusts can also be used, under certain circumstances, for asset protection. The assets in this type of trust are no longer owned by the person who placed the funds into the trust. Usually, the trust will have its own federal tax ID (EIN).
A Charitable Trust
A charitable trust is often used to provide benefit to a particular charity or the general public. During estate planning, charitable trusts may be implemented to gain relief from a harsh estate tax or gift tax. Sometimes during financial planning individuals may consider a trust known as the charitable remainder trust (CRT). A CRT that is funded in the midst of a grantor’s lifetime can provide the trustmaker with solid lifetime benefits. But beyond the obvious financial benefits, a charity will most likely honor the donors who have placed the charity as the recipient of the CRT’s benefits.
A Constructive Trust
Another type of trust that is an implied trust is known as a ‘constructive trust.’ A court may choose to review details, facts, and specific circumstances then rule that the property owner intended for the property to be utilized for a specific purpose or be transferred to a specific person, even if a declaration of trust was never formally installed. And as it is true that an individual could take legal title to property, other factors such as equitable considerations may dictate that the title belongs to another party entirely.
The Special Needs Trust
In some situations a person may need to be protected if they receive important government benefits. To avoid any possible disqualification of these government benefits a special needs trust may be the best option. A special needs trust is a legal means validated by Social Security rules with the caveat that the disabled beneficiary cannot regulate the amount or the timing of the trust distributions. Additionally, the rules stipulate that the disabled beneficiary may not rescind the trust. This may be a good option as it protects the individual’s right to their government benefits regardless of any inheritances or gifts they receive. This type of trust could allow the beneficiary to attain luxury items, etc. which could have put their government benefits in jeopardy had the trust never been established. Most trusts of this type are self-terminating if any scenario arises in which the trust could be used to disqualify the beneficiary from their government benefits.
Special needs are legally defined as anything necessary to maintain the disabled person’s comfort and contentment that are not provided by public or private agencies. There are many services, treatments, items, and products that could be considered special needs including medical or dental expenses, education, treatment or rehabilitation, equipment, eye glasses, necessary transportation, vehicle purchases, maintenance, and insurance. Additionally, premium payments for insurance on the beneficiary’s life are included, along with dietary and nutrition needs, daily money for spending, computers and equipment, electronics, vacations, movies, certain athletic contests, gift purchase money, companion payments, etc.
Parents of disabled children may choose to initiate a special needs trust to ensure their child is always cared for in the event that one or both parents die or are, for whatever reason, unable to care for their child. Also, a disabled person can establish a special needs trust for themselves when they expect to inherit money or assets in general, but the disabled person may not be the trustee.
The Spendthrift Trust
A spendthrift trust is defined as a trust that does not allow the beneficiary to sell off, or pledge interests in the trust to other parties. Spendthrift trusts are protected from any creditors the beneficiary may have, until the trust property is apportioned to the beneficiaries.
The Tax By-Pass Trust
Sometimes a spouse may desire to leave money to his or her spouse and limit the federal estate tax that would be levied upon the death of this second spouse. Assets can move to a spouse, free of taxes, however when the last surviving spouse passes away, any assets that exceed the established exempt limit would become taxable to their surviving children, and sometimes at an egregious 55%. A tax by-pass trust can help to circumvent this less than ideal situation. In some cases, their surviving children could be spared hundreds of thousands of dollars in federal taxes if the estate is quite valuable.
The Totten Trust
A Totten trust can be initiated during a grantor’s lifetime. It can be established by depositing money into a special account in her or his name as the trustee for another party. This is yet another type of revocable trust in which the gift cannot be completed until after the grantor’s death or an unambiguous act representing the gift during the lifetime of the grantor. The rules allow for an individual or an entity to be named as beneficiary. In the event of death, all Totten trust assets can completely avoid probate. Most often, a Totten trust is implemented with accounts and/or securities in institutions. While this type of trust cannot be used in conjunction with real property, it is considered to be a safer method to pass assets to one’s family than utilizing a joint ownership.
When creating a Totten trust, the title must officially include specific identifying language, such as ‘Payable on Death To,’ ‘In Trust For,’ ‘As Trustee For,’ or the corresponding correct initials for each, ‘POD,’ ‘ITF,’ or ‘ATF.’ The language is crucial in order to ensure the beneficiary is known. This type of trust is sometimes referred to as the ‘poor man’s’ trust because it may cost very little, if anything, to set up and is often executed with nothing in writing. A bank account with a “payable on death” designation is a form of a Totten Trust.
For more information on Trusts In Texas, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (512) 288-3200 today. Our Travis County Trust Administration Lawyers will guide you and will help you come up with an estate plan.