What is a trust?

There are many different kinds of trusts, and a few of the most common ones are described further below. However, all trusts have the major key elements below:

• Trust Agreement – The trust agreement is a legal document that spells out the purpose of the trust and how the trust should function in relation to the assets and the key players in the trust. The key players in the trust are the trustee, the grantor, and the beneficiary.
• Grantor – The grantor, sometimes called the trustor, is the person who creates the trust agreement. The grantor must decide who the trustee and beneficiary are, and the grantor must also fund the trust by transferring assets into the trust. Depending on the type of trust, the grantor may also be the trustee and/or the beneficiary.
• Trustee – The trustee takes legal possession of the trust assets and is responsible for managing and distributing the assets per the terms of the trust agreement.
• Beneficiary – The beneficiary is the person who receives the benefits of and distributions from the trust.

Testamentary Trusts

Testamentary trusts are the most common types of trusts that I create for clients in my law practice. Unlike living trusts (see further below) that are created and funded immediately, testamentary trusts are created in the wording of your will. So testamentary trusts don’t actually ‘come to life’ and get funded until after you die and your will is probated.

There are different situations when testamentary trusts are used, but the most common is when minors or young adults may potentially inherit significant assets via your will. By setting up a testamentary trust, if the named beneficiary is below a certain age at the time of your death (perhaps 25 years old as an example), then that beneficiary’s inheritance goes into a trust which is managed by a trustee that you appoint in the language of your will.

The trustee is given the ability to distribute assets to the beneficiary for health, maintenance and support types of needs while still retaining control of the assets remaining in the trust. This way the beneficiary who is still quite young will not get control of major assets until they are more financially and emotionally mature. The assets in the trust are also protected from creditors which is an additional bonus.

Revocable Living Trusts

Revocable living trusts are the second most common types of trusts that I create for clients in my law practice. Unlike a testamentary trust, a revocable living trust ‘comes to life’ as soon as the trust agreement is signed and the trust is funded with any assets. As the name ‘revocable living trust’ implies, the grantor has the ability to dissolve (or merely change) the trust at any time.

Perhaps the most touted benefit of using a revocable living trust is to avoid probate, because upon the grantor’s death the remaining assets in the trust get distributed per the terms of the trust rather than having to get distributed through some form of probate. However, in my opinion, revocable living trusts are often ‘oversold’ in Texas by some estate planning professionals.

Yes, the remaining assets in the trust do avoid probate. However, there is typically still at least some form of probate administration that must take place after the grantor dies, because it’s almost inevitable that not all of the grantors assets will have gotten put into the trust – for example a new car, artwork, jewelry, etc. Because of this, if a revocable living trust is created, it’s always a good idea to get what is called a pour over will created. A pour over will gets probated and ‘pours’ all the probate assets into the trust. And then all the assets, both old and new, in the trust get distributed per the terms of the trust. But of course this isn’t truly avoiding probate. And with a properly written will in Texas, probate is actually pretty efficient, especially compared to a state like California.

Having said all that, revocable living trusts can be useful to some people depending on their particular circumstances. For example, maybe they have real estate in another state. A probate administration in any state cannot distribute real estate located in another state. But you could put that out of state real estate into a revocable living trust, thereby preventing the need for a separate probate administration in that other state.

Another example for when a revocable trust might be useful is when the grantor thinks there is a good chance that their will is going to be contested in court. If the majority of their assets are in the trust, then there might be very little if anything to contest as far as the will is concerned.

Likewise, if the grantor thinks they have a good chance of becoming mentally disabled with Alzheimer’s or some other form of debilitating disease, then setting up a revocable living trust could be quite useful. If the grantor were to become too sick to manage and distribute the trust assets, then the wording of the trust would dictate who should become the new trustee who would then be able to help take care of the financial affairs of the grantor.