Trusts come in many different forms; they can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal relationship pursuant to which one person has an equitable ownership in the certain property, while another holds legal title. The trust involves three essential elements:
- A trustee, who holds title to the trust property and is subject to equitable duties to deal with it for the benefit of another
- A beneficiary, to whom the trustee owes equitable duties to deal with the trust property for his or her benefit
- Trust property, which is held by the trustee for the beneficiary
Trusts are classified either as an inter vivos trust or a testamentary trust. An inter vivos trust is a trust which is created and becomes effective during the lifetime of the settlor. It is also frequently called a living trust. It can be revocable or irrevocable. The inter vivos trust agreement ordinarily takes the form of a contract between the settlor and the trustee. The settlor’s assets are transferred into the trust while the settlor is alive. These assets, which become the trust corpus or principal, are either described in the instrument or in an attached schedule. The trustee usually acknowledges receipt of the property in the trust instrument.
A testamentary trust is a trust created by a will. Unlike an inter vivos trust, it is not in force during the settlor’s lifetime. Instead, it becomes effective after the death of the settlor and comes into existence pursuant to the terms of the will. Because the trust does not come into existence until the settlor dies, assets are not transferred into a testamentary trust during the settlor’s lifetime. Consequently, those assets must go through the probate process before being placed in the testamentary trust.
Types of Trusts
The two major types of express trusts are revocable trusts and irrevocable trusts. A “revocable trust” is a trust which may be terminated by either the settlor or some other person. An “irrevocable trust,” on the other hand, is a trust which by its terms cannot be revoked by the settlor or can be terminated by the settlor only with the consent of another who has an adverse interest in the trust, that is, someone who stands to benefit from the continued existence of the trust. Revocable living trusts are often used as “will substitutes” which allow the settlor’s assets to pass outside of probate. Irrevocable trusts are often created to make gifts that come with certain conditions or to support relatives of the settlor, and in the process minimize federal estate or gift taxes.
Advantages of Trusts
Depending on the situation, there may be many advantages to establishing a trust, including avoiding probate altogether. In most cases, assets owned in a revocable living trust will pass to the trust beneficiaries (or heirs) immediately upon the death of the trustor with no probate required. Certain trusts also may result in tax advantages both for the trustor and the beneficiary. Trusts may also be used to protect property from creditors, or simply to provide for someone else to manage and invest property for the trustor and the named beneficiaries. When well-drafted, another advantage of trusts is their continuing effectiveness particularly after the trustor dies or becomes incapacitated.
Contact a Houston Texas Estate Planning Attorney
Although there are many benefits to setting up trusts, they do require regular maintenance. Your estate planning attorney at The Gonzalez Law Group, PLLC, can help you decide if this option makes sense for you. Call now! Se habla español.