What Are Trusts? (Texas Law)

When it comes to estate planning, trusts play a crucial role in protecting assets and ensuring their smooth transfer to beneficiaries.

In Texas, trusts are governed by specific regulations that provide a comprehensive framework.

In this blog post, we will explore what trusts are, why they are important, the benefits they offer, and the general process of starting a trust in Texas.

What Are Trusts?

Under Texas law, a trust is a legal arrangement where a person, known as the “settlor,” transfers his or her assets to be managed by a “trustee,” who then manages the assets on behalf of the “beneficiaries” according to the trust’s terms.

Trusts are created to ensure the efficient transfer of the settlor’s assets to the beneficiaries. They also can offer additional asset protection and tax advantages.

A trust must have these 3 parties:

• The Settlor (the creator of the trust)
• The Trustee (the manager of the trust – there can be multiple!)
• The Beneficiary or Beneficiaries (the people who benefit from the assets of the trust)

Generally, a person can be 2 of the 3 parties listed above, but not all 3!

So, if you want to create a trust and manage the trust after it is formed, you would be both the settlor and trustee. Generally, you could not also be the beneficiary in that case.

Similarly, if you want to be the settlor for the trust and the beneficiary to the trust, you would need to find someone else to manage the trust as the trustee.

Note that there can be multiple trustees and multiple beneficiaries in a trust.

A Common Trust Arrangement

Here’s an illustration of a common trust setup.

Let’s say you have a house, some stocks investments, and some cash saved up.

First, you create a trust, and then move the assets into the trust.

The trust is then managed by the trustee.

The trustee is responsible for distributing assets to the beneficiaries according to the rules and restrictions set out in the trust.

Note that this is not the only way to potentially set up a trust, and it might not be the best fit for your situation.

It’s always worth speaking with an estate planning attorney before moving forward with any trust or other estate plan.

Revocable vs. Irrevocable Trusts in Texas

There are two primary types of trusts in Texas:

1. Revocable (also called a “living trust”): these trusts can be altered after formation. They provide the most flexibility for the trust creator.
2. Irrevocable: these trusts generally cannot be altered after formation (at least not easily!). This helps to avoid pressure from others who might want you to change the trust for whatever reason, and it offers potential tax and asset protection benefits.

Whether revocable or an irrevocable trust makes more sense depends on a person’s specific situation. It’s worth consulting with an attorney and a tax professional to better understand the impact of forming either type of trust.

Why Use a Trust?

Here are some of the primary benefits of trusts:

1. Trusts avoid probate! Unlike a will, which generally has to go through the probate court to be carried out, a trust does not need a probate proceeding. Instead, the trust handles the distribution of assets, not a court.
2. Trusts allow individuals to maintain control over their assets. By establishing a trust, a person can dictate how their assets will be managed and distributed, ensuring that their wishes are carried out precisely. Trusts are flexible tools that allow someone to add different rules and restrictions about how his or her assets will be distributed.
3. In some circumstances, trusts can offer protection from creditors. Assets held in certain types of trusts can be shielded from potential creditors and legal claims, providing an additional layer of security.

Unlike a will, which distributes assets only after death, trusts can be structured to distribute assets over time or under specific conditions.

For example, a trust can be set up to provide for a child’s education expenses gradually, or to distribute assets to a someone only after that person reaches a certain age, ensuring responsible fiscal management.

Starting a Trust in Texas

Here’s the general process of starting a trust in Texas:

First, the settlor must determine the type of trust that suits their needs, such as a revocable living trust or an irrevocable trust.

Next, the settlor must pick a trustee. The trustee will be responsible for managing the trust assets and ensuring the trust’s terms are carried out. In many cases, the settlor can also be the trustee!

Once these decisions are made, the settlor and trustee will execute a trust agreement. This document outlines the trust’s terms, including the beneficiaries, distribution instructions, and any specific provisions or conditions. Working with an attorney is highly recommended during this stage to ensure the trust document complies with Texas laws and accurately reflects the settlor’s intentions.

After the trust document is drafted, it must be signed and notarized. Trusts generally do not have to be witnessed in Texas (like a will might), but it is often best practice to have the document signing witnessed by two witnesses.

Whatever the case, it is crucial to follow the formalities required by Texas law to ensure the trust’s validity.

After the trust agreement is signed, it gets submitted to the county for recording.

The settlor will transfer assets into the trust’s name, as outlined in the trust document.

Once the assets are in the trust, the trustee will manage those assets to make sure they ultimately get to the beneficiaries as intended.

Conclusion – Texas Trusts

Trusts are powerful tools in estate planning that offer numerous benefits for individuals in Texas.

With careful planning and a well-structured trust, individuals can enjoy peace of mind knowing their assets are secure and will be distributed according to their wishes.

When building any estate plan, you’ll want an attorney on your side. At Duffley Law, we help our clients prepare trusts, wills, and other estate planning tools to make sure their assets go where they want them to!

Contact us to set up a FREE consultation today to see what kind of estate plan makes the most sense for you and your family!