You Might Need a Revocable or Irrevocable Trust

Depending on the nature of the property you own and how it’s titled, you may want to ask your lawyer to create a trust that will help you meet all your estate planning needs. To prepare for such an appointment, be sure to take along two lists – one noting all the properties you own and the other indicating the beneficiaries you want to help by naming them in the trust.

Your attorney will need to ask some general questions to help you decide which one of these trusts is best suited to your current financial situation.

Before describing some of the precise differences between revocable and irrevocable trusts, this article will note some of the general reasons why they’re often desirable.

What general benefits do trusts often confer on estate planning clients?

  • They can help maximize family privacy. Most property that passes to beneficiaries under trusts is never publicly disclosed — except to the extent that certain taxes may be owed on gifts given or received. Obviously, when property passes through probate, members of the public can learn about your estate by reviewing court records. Therefore, trusts offer greater privacy;
  • Trusts can help protect your assets from outside creditors. While this goal can be achieved if you’re not attempting to defraud others when you have the trust created, you must be prepared to answer questions if creditors sue you. If you want to put assets in a trust in hopes of getting around specific Medicaid rules and regulations, you must let your lawyer explain how the government prevents fraud in this legal area;
  • They can provide specific tax advantages. For example, since property or assets placed in an irrevocable trust account are considered owned by the trust and not by the grantor who had it created, those assets will not be treated as part of your estate (for tax purposes) at the time you pass away. (However, any assets in a revocable trust when you die will be taxed as part of your overall estate);
  • Trusts can provide added financial security to a dependent disabled person. In order to qualify for some Social Security benefits, recipients must meet certain financial criteria. If they own too much property or are too wealthy, they won’t be qualified to obtain key benefits. One legal way to get around this problem is to place assets in an irrevocable trust and name the disabled person as a beneficiary. Your Houston estate planning attorney can explain this process in greater detail. Aging parents and others often set up trust accounts like this to be sure seriously disabled family members will have enough to live on in the future – long after others have passed on;
  • At the time of a divorce, most trust funds should remain protected. However, you cannot place funds in a trust prior to a divorce to try and defeat your spouse’s community property rights;
  • Properly created trusts have long helped grantors provide for the basic needs of their loved ones.

It’s important to note that all trusts are categorized as either “testamentary” or “living” (inter vivos) trusts. The latter type become viable during the grantor’s lifetime – while testamentary trusts – which are directly linked to your Will — don’t go into effect until you’ve passed away.

What are some specific benefits of revocable trusts?

  • They can provide ongoing control over all trust assets. If you create a revocable trust, you can decide if you want to serve as the trustee and move certain assets in and out of the trust when you choose, depending on the terms you created for the trust;
  • You can change the terms of the trust when you choose. This might mean picking a new trustee or altering the list of beneficiaries;
  • They are relatively easy to handle at tax time. As the grantor (or creator) of this trust, you can simply declare your earnings from the trust in your personal tax return.

What are some specific benefits of irrevocable trusts?

  • The trust assets are usually considered safe from the reach of outside creditors. This will prove true if you didn’t have the trust created to defraud others. Courts will review all aspects of the trust’s initial drafting when checking to be sure it wasn’t set it up to defeat known debts;
  • As noted above, disabled people needing to receive special Social Security benefits can often receive critical added funds from properly drafted irrevocable trusts;
  • For tax purposes, the IRS and others don’t usually view these trust assets as being owned by the grantor at the time of his/her death. Therefore, any assets in the trust at the time the grantor dies will not be added to assets outside the trust when calculating any estate taxes that may be due.

Always keep in mind that the laws controlling the creation of trusts change periodically. Be sure to always confer with your Houston estate planning lawyer who keeps up with such changes before ever trying to create or modify a trust. Attorneys also stay abreast of all new state probate laws that may affect clients’ estate plans.

Should you need any help with creating or updating a trust account, please feel free to contact one of our Murray Lobb attorneys. We’re ready to provide the legal advice you’ll need to fully protect your assets in the future. Our firm can also help you revise your estate plan as your family continues to grow and new investments are added to your portfolio.

Basic Requirements for Creating a Trust in Texas

Before meeting with your lawyer to create a trust, it should prove helpful to first review the following general legal terms and requirements that govern this effort. Once you understand your duties and the different parties you’ll need to name in the trust, you’ll be better prepared to begin listing the property you wish to transfer through your trust.

Key terms such as grantor, trustee, beneficiary and trust agreement

If you’re the party seeking to create a trust, you may be referenced in the trust document as the grantor, settlor or trustor. In order to create a valid trust in Texas, you must have the present intent or goal to create this type of document that allows you to protect property in a trust during your lifetime. Depending on the exact type of trust you create, you may also retain the right to fully control the property during your lifetime – which may include moving specific bits of property it in and out of the trust according to your needs.

Among your various duties as the grantor, you’ll need to decide who you want to name as the trustee – or controlling party – of your trust. If you choose to create the type of trust that must be managed and controlled by another party, you’ll have to decide if this should be your lawyer, a family member or another party with strong financial management skills.

As the creator of the trust, it will also be up to you to carefully describe all the duties you want your trustee to handle and how you prefer that those duties be carried out. And if you’ve chosen to act as the trustee, you should also name a potential “successor trustee” who can step in and take over if (or when) you become incapacitated — or pass away.

Additional requirements that must be met when creating your trust

You’ll need to be of sound mind, fully capable of understanding all that you’re trying to do with your property and have a proper legal purpose for the trust. In other words, you’ll just need your lawyer to state the specific type of lawful trust that you’re creating – such as a revocable, irrevocable or spendthrift trust – and which parties will receive the benefit of the properties held within the trust.

Texas law also mandates that your trust fully complies with all the requirements of the Statute of Frauds. This basically means that the trust is set forth in writing and is properly executed in full keeping with that statute so that it’s legally enforceable in a court of law. Your Houston estate planning attorney can also explain to you why certain gifts must become vested within set time periods so that they’re not in violation of the Rule Against Perpetuities.

Why you may need more than one trust

In addition to creating a trust that provides all your property with certain tax advantages during your lifetime, you may also wish to create an educational trust that will benefit your grandchildren or even one to cover the needs of a beloved pet after you pass away.

A simultaneous review of your entire estate plan will also benefit you

Whether you’re married or single, it’s always wise to carefully review all your assets with your attorney when creating a trust. In some cases, you may even want to go ahead and change how certain property is currently titled and change some investment accounts so that they’ll pay out directly to specific beneficiaries at the time you pass away – thereby lessening the duties of any party you’ve named as your trustee.

Please feel free to contact one of our Murray Lobb attorneys so we can create the type of trust you currently need. We’ll also help you review your overall estate plan and provide you with legal advice about the right way to properly manage any property or business interests not currently covered by a trust.

What Kinds of Property Can Be Placed in a Revocable Living Trust?

A revocable living trust is an estate planning document that allows its trustee to actively control many properties and possessions during an entire lifetime. Both new and older possessions can be freely moved in and out of this trust and left to various beneficiaries. Once the trustee passes away, all the property still held by the trust can immediately pass to the beneficiaries and avoid incurring unnecessary probate fees.

Since real estate, business interests and personal possessions can be quite varied, it’s wise to discuss their individual characteristics with your lawyer before placing them in this type of trust. This especially holds true if you plan on buying and selling some of your possessions on a regular basis. In some cases, it may be easiest to allow a few less expensive properties to pass through probate when their value will help minimize any fees.

Here’s an overview of the type of personal possessions, real estate, business accounts and other items that you may want to place in your revocable living trust (RLT).

Types of property often placed in a revocable living trust

  • Real estate and houses. You can place these in a revocable trust, even if they’re encumbered by mortgages. Of course, any debt still owing on the property will pass to the beneficiary;
  • Legal interests you own in most small businesses. You’ll need to give this very careful thought since you’ll want to be sure your beneficiaries can capably run the business and handle other required tasks. Also, you and your Houston estate planning attorney need to carefully read all the small print in your business contracts to be sure they don’t specifically forbid the transfer of your ownership interests into a trust. Other formalities may also become pertinent. For example, if you’re a partner in a group governed by a partnership ownership certificate, that document may have to be changed to indicate your trust is the legal owner of your share in the business. Somewhat similar issues may arise if you own shares in certain types of corporations;
  • Stocks, bonds, bank and security accounts. While it can prove useful (if allowed by the terms of each account) to place all of these in your revocable living trust, it may be simpler to just a name a TOD (transfer on death) beneficiary for one or more of these accounts. Ownership can then pass directly to your beneficiaries as soon as they produce legal proof of your death;
  • Copyrights, trademarks, royalties and patents. These can all be placed in your LRT (living revocable trust). After you pass away, the rights – and limitations – that governed these interests will pass on to your beneficiaries;
  • Gold, silver and other precious metals. Before deciding whether it’s wise to place these in your trust, be sure to get them accurately appraised;
  • Prized pieces of artwork, antiques (and less expensive) furniture. Be sure that all these unique items are properly insured before placing them in your trust;
  • Your collectibles. These often include coins, stamps and other unique items you may have spent a lifetime collecting. (Be sure all these items are also properly appraised and insured).

Should you place your life insurance policy into your revocable trust?

If you’re considering this move because you’re trying to protect the policy proceeds from having to go through probate, be aware that such proceeds automatically bypass probate and go straight to your named beneficiaries. However, if the only beneficiary of your policy may still be a child should you suddenly pass away, you may want to put the life insurance policy into your trust and name the living trust as the beneficiary. Your lawyer can then make sure that the trust names an adult to manage the proceeds of the life insurance policy for the specifically named child until s/he reaches adulthood.

How should 401(k), 403(b), IRA and qualified annuity accounts be handled?

You can create various tax problems for yourself by trying to transfer these into your LRT. Ask your lawyer if it would be better to just change the beneficiaries named for these accounts.

Should you place ownership of any vehicles in your trust?

If you use them regularly, this is often not practical. However, if you own one or more antique autos, you may want to talk with your attorney about whether it’s fully beneficial to hold title to them in your trust – or if there’s a better way to keep them out of the probate process.

Can oil and gas mineral rights be placed in a revocable living trust?

What you can do with these depends on the precise nature of the rights you hold. Ask your Houston business law attorney if you should create an assignment to these rights or try to formally obtain a new deed before transferring them into your revocable living trust.

Please contact us and allow one of our Murray Lobb attorneys to help you draw up any living revocable trusts you may need to help protect your personal property and possessions.

Basic Facts: Special Needs and Pooled Trusts

If you want to give money to a disabled family member receiving government benefits like SSI (Supplemental Security Income) and Medicaid, consider setting up a special needs trust and naming that person in your Will. Careful planning is required since disabled people can lose their eligibility to receive certain benefits if their net worth and assets increase.

Once you’ve created the proper type of trust account, your disabled family member will be in a better position to: (1) start receiving an added monthly stipend or inheritance from a family member; (2) accept a large sum of money after surviving a serious vehicle accident caused by another person’s negligence; or (3) receive funds from another unusual source.

Here’s additional information about creating SNTs – special needs trusts. You may want to set up a third-party or first-party SNT – and possibly even a pooled trust.

Here are some of the unique features offered by third-party SNTs (special needs trusts)

The American Bar Association says that this type of SNT, also referred to as a supplemental needs trust, can be used to help a disabled beneficiary receive a gift or inheritance from a third party such as a relative. However, it should never to be used for any assets or money that already belong to the beneficiary.

Based on the general terms you set forth in the trust, your trustee will then determine the exact way all funds will be used to help your beneficiary (or loved one). While many of these types of trusts are considered testamentary (part of someone’s estate), they can also be used for inter vivos transfers of gifts (those made while the person making the gift is still alive).

Like the third-party SNT described below, this first-party type should be set up so that the recipient’s government benefits remain their primary source of income — and these types of added funds are simply a supplemental source.

What are some of the unique attributes of a first-party SNT (special needs trust)?

While sometimes referred to as self-settled special needs trusts, these are mainly created to receive assets that are the beneficiary’s legal possessions. As is true of most SNTs, you’ll need the help of a highly experienced Houston business law attorney to help you create one since the multiple state and federal laws governing them can periodically change.

What’s most unique about this type of trust is that it must include a provision stating that when the beneficiary dies – depending on the exact amount of assets still contained in the SNT — Medicaid must be repaid for all funds that were ever spent on the beneficiary.

Those who most often benefit most from these types of first-party, special needs trusts usually fall into one of the two following categories.

  • They are under age 65 and want to receive funds worth more than $2000 (or more than the net worth amount currently allowed by law) – while remaining eligible for government benefits — or
  • They have received (or will receive) an unexpected financial windfall – possibly as the result of a personal injury lawsuit following a car accident.

Keep in mind that first-party SNTs can only be established by a parent, grandparent, legal guardian or court for a special needs person.

If you can’t afford a trust administered by a paid trustee – ask about “pooled” trusts

When funds are limited, you can ask your attorney to create what’s often referred to as a “pooled trust.” This type of account containing a disabled person’s money can be added to funds that have been deposited for other special needs individuals.

All of these accounts are then monitored and administered together by a non-profit board or agency. Among other tasks, your attorney may need to create a joinder agreement (or review one offered to you) as you start applying to various types of appropriate pooled trust groups.

Many disabled adults prefer this approach since they can personally help establish their own “pooled trust” with an organization set up to administer such accounts – without the help of other family members.

Whatever else you do, try to avoid simply giving extra funds to a family member so that person can later provide for all the disabled person’s needs. Given human nature, that money may never wind up being spent to benefit the person with special needs.

Please contact one of our Murray Lobb attorneys so we can use our lengthy experience creating special needs and other trusts to protect your disabled loved one’s financial interests — both now and in the future.

Common Reasons for Creating a Spendthrift Trust

Nearly all of us have relatives who need extra help managing their income and assets. When we can, we try to find ways to help them. In some instances, you might have a grandson or granddaughter who’s having trouble holding down a steady part-time job during college – or trying to make ends meet after battling a lengthy addiction. Your troubled relative might also be older and starting to struggle with handling all his monthly financial affairs.

Whatever the individual’s special needs may be, you can often help by making the person a beneficiary of a spendthrift trust.

How Should You Define This Type of Trust to the Beneficiary?

You may first want to simply say that, because you greatly care for this individual, you want to remove all or most of her current money management problems from her life. You can then say that you’ve named the person as a beneficiary of a special trust account that will be managed by a trustee. You should then quickly point out that you’ll be personally choosing the exact terms governing the trust so the trustee can properly meet specific needs of the beneficiary.

Should the beneficiary ask if she can personally manage the money, you must be ready to say that you have considered that alternative and prefer to disburse the funds over time. You might also note your desire to prevent the funds from being taken by untrustworthy creditors. (Of course, there are legal exceptions that do allow some creditors to reach these funds, and they’ll be briefly addressed below).

It’s also useful to tell the beneficiary that the funds or property that you’ll be placing in the trust as its creator (grantor) are generally referred to as the trust principal.

What Basic Terms and Provisions Are Normally Included in a Spendthrift Trust?

As your Houston estate planning lawyer will tell you, specific language must be included in the trust document, making it clear that you’re creating a spendthrift trust, in keeping with Texas law. This enabling language is designed to fully protect all the property and funds that you’re placing in the trust from others who might try to illegally reach them. All of this is clearly explained in the Texas Property Code, Title 9, entitled “Trusts.”

Your spendthrift trust language will clearly state that since the beneficiary has no right to directly reach and control the funds – neither can most creditors. Most grantors also include some specific language indicating that they are trying to provide for the beneficiary’s general needs.

As the grantor/settlor you must also clearly state all the trustee’s rights, duties and obligations while administering the trust. The trustee’s job can be a very difficult one, especially if the beneficiary decides to legally challenge the trustee by demanding large sums of money for serious medical, educational or basic living expenses not expressly referenced in the trust.

When Can Creditors & Other Parties Successfully Obtain Funds from a Spendthrift Trust?

The laws in most states allow creditors that can prove that a beneficiary owes them money for basic “necessities” (like shelter or food) to win judgments and collect funds from these types of trusts. Other legal obligations that can be paid out of spendthrift trust funds (once legal action has been taken) include child support, alimony or support of a past (or current) spouse and certain government claims.

When funds are periodically released to a beneficiary, creditors can also try to obtain them based on judgments they’ve obtained. 

Please feel free to contact one of our Murray Lobb attorneys to learn more about the various types of trusts and other estate planning tools that we can draft to meet all your needs, including a spendthrift trust.

A Basic Understanding of Trust Documents

A Basic Understanding of Trust Documents

Although many people still request Wills from their attorneys, it’s now often best for tax purposes to have the bulk of your estate transfer to others through one or more trusts. To better understand how trusts work, you first need to understand that there are living trusts and testamentary trusts.

Living trusts, also known as “inter vivos” trusts, are created during the grantor’s (or requesting party’s) own lifetime. By contrast, a testamentary trust is created within a Will and doesn’t become legally enforceable until after the grantor has died. As your estate planning attorney will tell you, there are two types of living trusts – those that are revocable and those that are irrevocable.

Revocable trusts let you maintain control over the trust assets, allowing you to revoke or change the trust’s terms whenever you believe it’s necessary. Should you instead create an irrevocable trust, the law no longer views the assets in the trust as yours – therefore, you normally cannot make any changes to the trust without the trust beneficiary’s consent.

While there are many different types of trusts and ways to set them up, the following ones are among those commonly requested by clients.

Frequently Requested Trusts

The Charitable Lead Trust. This type of trust can be created during the grantor’s own lifetime or upon that individual’s death. It provides for a type of annuity to be given to a charity for life or for a specific term of years. If there are any remaining trust assets, they are passed on to non-charitable beneficiaries when the trust terminates.

The Credit Shelter Trust. Many married couples with children often choose this type of trust because the surviving spouse can maintain full rights to the trust assets until his or her death. At that time, the trust benefits can then pass to the children. This trust is also commonly used because it allows the creator to escape estate taxes when passing the trust assets on to heirs.

The Irrevocable Life Insurance Trust. When you move your life insurance out of your estate by having this type of trust created, it’s no longer part of your taxable estate. The funds are then readily available to help pay for any possible estate costs or for other immediate cash needs of your beneficiaries.

Generation-Skipping (or Dynasty) Trusts. Grandparents often like to set these up because they’re designed to allow grantors to give tax-free money to beneficiaries who are two or more generations their junior.

The Qualified Terminable Interest Property (Q-TIP) Trust. If you’re in a second or third marriage and you and your current spouse had children during earlier marriages, you’ll want to learn more about this trust. It helps you not only leave your surviving spouse with income, it also lets you leave specific assets to your various children.

The Qualified Personal Residence Trust. You can use this to remove the value of either your main residence (or a vacation home) from your estate. It’s especially wise to create this type of trust regarding a property that’s very likely to increase in value over time.

The Special Needs Trust.  Many families have at least one member who suffers from some type of serious physical or mental disability. When you set up this type of trust, its terms can be restricted regarding how the assets can be used – thereby still allowing your loved one to qualify for certain types of government benefits.

As this article indicates, there are many different types of trusts that offer distinct advantages and disadvantages. Please feel free to contact our firm with any questions you may have about the specific types of trusts that may best suit your goals and preferences.