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Trusts
Trusts

A trust is a legal relationship created by an individual or individuals for themselves or others as beneficiaries and normally managed by a third party trustee on behalf of the beneficiaries under the specific terms of a trust agreement or a trust created in a Will.   A trustee is a named or court appointed individual or bank trust department that works with the beneficiaries, maintains accountings, files taxes and manages the assets in the name of the trust. There are a variety of trusts created and most are designed in specific unique ways to benefit others based on their needs. Generally, the basic trusts are revocable and irrevocable, inter-vivos (created during the grantor’s life) or testamentary (created in a Will), created to benefit individuals or charitable institutions. 
 

Types of Trusts 

Revocable
  • A revocable trust is created by the grantor during his or her lifetime and is often called a revocable living trust.
  • The grantor may change the trust at anytime, including terminating it altogether.
  • The grantor also has free access to the assets of the trust because of its revocable nature and unlimited access to the trust assets.
  • This type of trust is primarily used for incapacity planning purposes and to avoid probate at the grantor’s death, thus reducing court costs and providing privacy.
  • These trusts do not have creditor protection or tax savings benefits.
Mt. Vernon, Texas

Irrevocable
  • Irrevocable trusts are usually created by the grantor to benefit others, often children, grandchildren or even friends and charities.
  • Once established, these trusts generally cannot be changed in any meaningful way.
  • Irrevocable trusts are often used to hold lifetime gifts from the grantor for the beneficiaries and to receive and manage additional assets on behalf of others following the grantor’s death.
  • Such trusts allow the grantor control long term beneficiary distributions through the terms established in the trust document.
  • Tax planning and asset protection are two reasons these trusts may stay in place for multiple generations.

Testamentary
  • Testamentary trusts are usually created through one’s last will and testament.
  • Once established, these trusts generally cannot be changed in any meaningful way.
  • Testamentary trusts are often used to hold gifts at death from the grantor for the beneficiaries and to manage assets for others following the grantor’s death.
  • Such trusts allow the testator control through the terms established in the will.
  • Tax planning and asset protection are two reasons these trusts may stay in place for multiple generations.
     
Trustee Beneficiary
The person or entity that controls the trust and is responsible for managing the trust assets is called the trustee. The trustee holds legal title to, but not ownership of, the assets held in the trust.
 
A beneficiary is a person or an organization (such as a charity) that will receive income or principal from the trust.  The terms of the trust outline who will receive distributions from the trust and when distributions will be made.
 

Texas Statutes
A trustee has a number of specific duties under Texas Statutes.  A trustee must act with the utmost care and honesty in carrying out the directions of the person who appointed the trustee to serve.  Review these statues here.



Trustee Rights and Liabilities to Third Parties
Learn more about Trustee Rights and Liabilities to Third Parties by clicking here.



Gifts to Minors
There are several ways you can make gifts to your minor children or grandchildren.  If your goal is to fund education, certain strategies are better suited for that.  A separate summary, Choices for Funding Education, discusses the choices for funding a child or grandchild’s education.  This summary will give an overview of the main choices to be considered for gifts to minors when education funding is not the primary goal.

To learn more about gifts to minors, please click here.


Generation Skipping
A tax-efficient estate plan should address not only the estate tax but also the generation –skipping transfer (GST) tax.  Common GST tax planning involves establishing trusts for grandchildren and future generations.  Generally, the longer these trust last, the more estate tax that can be avoided.  Just how long such a trust can last depends on the State in which you establish the trust.  Some states, such as Delaware, would allow the trust to last as long as your want.

To learn more about generation skipping trust planning, please contact us.
Generation Skipping Tax Trusts - click here
Mt. Pleasant , Texas

Gifts to Spousal Trust
An often overlooked but simple planning opportunity is the making of annual exclusion gifts to an irrevocable trust for the benefit of a spouse (instead of outright gifts directly to the spouse).  The gifts are designed to intentionally fail to qualify for the marital deduction so that the annual exclusion applies instead.  By utilizing the annual exclusion instead of the marital deduction, the transferred wealth that remains in the trust will be excluded from both the transferor spouse’s estate and the transferee spouse’s estate.




2503(c) Trust
A 2503(c) Trust is a trust established to hold gifts for one child until age 21.  This form of irrevocable trust is named after the section of the Internal Revenue code upon which it is based.  As a general rule, a gift to an irrevocable trust does not qualify for the annual gift tax exclusion ($14,000 for 2013).  However, a gift to a trust that meets the requirement of Section 2503(c) will indeed qualify for the annual gift tax exclusion. This summary will give an overview of the requirement and characteristics of a 2503(c) Trust.

To learn more about 2503(c) trusts, please contact us.



Health and Education Exclusion Trust
Your estate plan might include transfers to children, grandchildren and further generations.  Transfers of wealth to grandchildren (and beyond) are subject to the generation-skipping transfer (GST) tax and its current $5,250,000 exemption.  However, if you are charitable inclined, a special trust can be established to further maximize wealth transfers to your grandchildren and beyond.  This trust is known as a “Health and Education Exclusion Trust,” or a HEET.

To learn more about Health and Education Exclusion trusts, please contact us.



Trustee Self Dealing and Other Conflicts of Interest
Generally speaking, trust agreements may relieve individual trustees of certain duties, liabilities and restrictions but the Texas Trust Code (“Code”) prohibits trustees from engaging in many transactions where a trustee is acting in more than one capacity.  To learn more about Trustee Self Dealing and other Conflicts of Interest, please click here.



Texas Trust Code Prudent Investor Standard
Current Texas trust statutes are based on the Uniform Prudent Investor Act and that a trustee manages a trust portfolio based on the prudent investor standard and discussed in general as noted above.  At that time it was in effect in Texas was to establish that the trustee was under a duty to the beneficiaries to invest and manage the assets of a trust as a prudent investor would when exercising reasonable care, skill, and caution, as applied to investments not in isolation but in the context of the total portfolio as a part of an overall investment strategy, incorporating risk and return objectives reasonably suitable to the trust.

Click here to review The Texas Trust Code Prudent Investor Standard.


 
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