Law Offices of Rhonda S. Ross

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Houston, TX 77008

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Law Offices of Rhonda S. Ross

How Is A Trust Defined? What Are The Different Types Of Trusts?

A trust is created during the lifetime and survives the death of the trust maker. The elements of a trust are the grantor/donor who supplies the assets of a trust. The second element are the beneficiaries or the ones who receive the assets pursuant to the terms of the trust. Next is the corpus or the assets of the trust. Until the assets are “in” the trust, you don’t actually have a trust. The trustee is a person or a bank who manages the assets.

A revocable trust is made up of a trust donor, who is the one who contributes the money and the property, and the trustee, who takes care of the trust assets. The trustee has a duty to handle a trust in a proper way and Texas gives a lot of guidelines on how a trustee should act. The benefit of a trust is that it avoids probate and a trust can be formed after the death of the trust maker. The disadvantages are that it’s not an asset protection vehicle. The trust is going to make money or lose money, like a business. You never know if you are going to have a lot of money at the end of a trust or almost none. An irrevocable trust cannot be changed, altered, modified or revoked after its creation. This is both a benefit and a disadvantage. Once the trust maker makes an irrevocable trust, the trust pays the taxes and the trust maker doesn’t have to pay the taxes on his assets. It’s really good for, for example, Medicare planning.

An asset protection trust is designed to protect a person’s assets from claims of future creditors. In other words, it insulates the assets from the creditors and avoids gift and estate taxes. Any future creditors who may be owed money from the testator or the trust maker would not be able to get to the assets of that trust, because it’s an “asset protection” trust.

A charitable trust benefits a particular charity or the public in general. The benefits are that it provides the trust maker with valuable lifetime benefits. He or she would have to give the interest earned on the trust to the charity and it would maintain all his assets for his family after death. The trust maker also usually gets lots of attention. That is one of the reasons why people like to do charitable giving, because they like the admiration and the thanks they get.

A constructive trust is an implied trust. It is unusual in the trust arena because most trusts must be in writing. An implied trust does not have to be in writing, but a court has to decide whether the grantor intended to make a trust for a particular purpose. An example of that is a wealthy person on his death bed deciding that he wants to give his grandchildren a part of his estate. So, the family goes to court and says they would like to make this verbal trust a constructive trust for the benefit of the grandchildren, and the court would take evidence and do everything just like at trial and decide whether or not that is truly a trust.

A special needs trust is where someone receives government benefits, such as social security or Medicare. It’s allowed under the social security rules as a benefit and it cannot be dissolved by the beneficiary; it cannot be changed, it cannot be distributed (or the frequency of distributions cannot be changed), and it cannot be revoked. A special needs trust might make the person ineligible for trust benefits so that needs to be considered when developing a special needs trust.

A spendthrift trust is one where the beneficiary cannot sell or pledge away interest in the trust. For example, if a beneficiary owes gambling debts and says, “I’m going to get a big distribution from my trust when I’m 24 and I’ll pay you off then.” Most trusts will have spendthrift language where they cannot pledge or sell away future interests in the trust. This protects from the beneficiary’s creditors until such time as the trust property is distributed out of the trust.

A tax bypass trust is one that allows one spouse to leave money to another spouse and bypass the trust. This is similar to the Q-TIP trust and it limits the amount of federal estate taxes that would be payable on the death of the second spouse, whereas the Q-TIP trust doesn’t really give the beneficiaries many other benefits. A disadvantage of the tax bypass trust is that assets can pass to a spouse tax free, but when the second spouse dies the remaining assets go to the children they would have to pay taxes for the full amount more than the exempt limit at the rate of about 55%. So the kids will be the ones who pay all the taxes, not the surviving spouse.

A Totten trust is one that you probably have seen before, but you may not know what it’s called. It’s created during the lifetime of the grantor by depositing the money into the account of a financial institution: your checking accounts, your savings accounts, your 401(k) accounts. So you put it in your own name for the benefit of whomever you want. It’s a type of revocable trust. An individual or entity can be named beneficiary with the one who is the trust maker. The benefits are that it avoids probate and is a safer method than using a joint ownership account. However, it’s much better to put a designation, such as a life estate, in that checking account or a joint checking account with a joint tenancy. There are all sorts of designations the bank allows you to put on the beneficiary space. The disadvantage is that it cannot be used for real property.

For more information on Types Of Trusts In Texas, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (281) 216-8778 today.

Rhonda S. Ross, Esq.

Call Now For A Consultation
(281) 216-8778