Trusts can be an incredibly useful estate planning tool. But with so many types of trusts available, how do you know which suits your needs? This article will review the most common types of trusts available in Texas to help you understand the options.
A trust allows a grantor to transfer assets into a trust, which a trustee then manages to benefit the trust’s beneficiaries. Trusts can help avoid probate, minimize estate taxes, protect assets, and more. With an experienced estate planning attorney’s help, trusts can be customized to meet various estate planning goals.
This article will provide an overview of the most common types of trusts available in Texas to help you understand the landscape of options.
What are the Main Categories of Trusts?
There are two main categories when it comes trusts – revocable trusts and irrevocable trusts.
Revocable Trusts
A revocable trust can be changed or terminated by the grantor. The grantor maintains control over the trust and its assets during their lifetime. Common examples include:
- Living Trusts: Avoids probate and may include disability planning. Assets remain in the grantor’s name.
- Life Insurance Trusts: Removes life insurance proceeds from the taxable estate. The grantor controls the policy and trust.
Irrevocable Trusts
An irrevocable trust cannot be changed or revoked once executed. The grantor gives up control over the trust assets and terms. Common examples include:
- Bypass/Credit Shelter Trusts: Created at death to minimize estate taxes for married couples.
- Special Needs Trusts: Allow beneficiaries to receive government benefits while using trust funds.
- Spendthrift Trusts: Protect trust assets from beneficiaries’ creditors.
The choice between revocable and irrevocable depends on your goals. An estate planning attorney can help you decide.
Most Common Types of Trusts in Texas
While the possibilities are nearly endless, these are some of the most common types of trusts used in Texas estate plans:
Revocable Living Trust
This is a very common estate planning tool in Texas, which allows the grantor to retain control over the trust during their lifetime. It avoids probate and provides continuity of asset management if the grantor becomes incapacitated. The trust assets transfer directly to the beneficiaries upon the grantor’s death.
Irrevocable Life Insurance Trust (ILIT)
This type of trust owns a life insurance policy on the grantor, keeping the policy proceeds out of their taxable estate. The ILIT beneficiary receives the payout when the grantor passes away.
Special Needs Trust
This irrevocable trust benefits a beneficiary with special needs without disqualifying them from government benefits. A trustee manages distributions for supplemental needs like therapy.
Spendthrift Trust
Designed to limit the beneficiary’s access to the trust funds to protect assets from creditors, overspending, or divorce proceedings. A third-party spendthrift trust restricts payments directly to the beneficiary.
Bypass/Credit Shelter Trust
Created at death through a will or living trust, this trust shelters assets up to the estate tax exemption for the benefit of a surviving spouse and heirs, minimizing estate taxes.
Testamentary Trust
Established in a will, a testamentary trust distributes assets per the grantor’s instructions at their death, without passing through probate. It can only be changed or revoked through a new will.
Charitable Trust
Establishes ongoing payments to a designated charity. Can provide income tax deductions and reduce capital gains taxes for the grantor. The charity obtains the remaining trust assets after a specified period or event.
Generation-Skipping Trust
Used to pass assets to beneficiaries at least two generations below the grantor, while avoiding estate and gift taxes. Commonly used by wealthier families for tax minimization purposes.
Asset Protection Trust
Designed to shield assets from potential creditors. May only allow distributions at the trustee’s discretion. Often established in jurisdictions with favorable asset protection laws.
How to Choose the Right Trust
Selecting the appropriate types of trusts for your specific situation depends on several factors:
- Your goals: What do you want to accomplish with the trust – avoid probate, minimize taxes, protect assets, care for a loved one with special needs? Identify your key objectives.
- Beneficiaries: Consider who will benefit from the trust and any special circumstances like disability, bankruptcy, divorce or addiction issues.
- Assets to be transferred: What assets do you want to place into the trust – real estate, life insurance, business interests, investments? Some trusts are better suited for certain asset types.
- Control considerations: With a revocable trust, you retain control, while an irrevocable trust limits your control. Will you be comfortable ceding control to a trustee?
- Timing issues: When do you want the trust to take effect – during your lifetime or at your death? How long should it last?
- Tax implications: Specialized trusts like ILITs and generation-skipping trusts offer estate and gift tax savings. An estate planning lawyer can advise you on tax planning.
- Your comfort level: Consider factors like costs, complexity and loss of control before committing to a trust strategy.
How Much Does It Cost To Set Up A Trust In Texas?
Setting up a trust in Texas can vary substantially based on the type of trust, attorney fees, size and complexity of your estate, and other service costs. According to a 2022 survey by Us Today, the average cost to establish a living trust with an estate planning attorney ranges from $1,500-$5,000. Here are some guidelines on Texas trust costs:
- Basic Revocable Living Trust: Approximately $2,000-$4,000. Includes attorney fees to draft the trust and transfer assets. Lowest cost option.
- Complex or High-Value Trust: Significant assets like real estate, business interests or estate tax exposure can increase costs to $4,000-$8,000+.
- Administering the Trust: Approximately $200-$500 per year if using a corporate trustee. More for complex trusts requiring active management.
- Tax Planning Trusts like ILITs: Can cost $2,000-$6,000+ for creation and ongoing maintenance fees.
- Court Proceedings for Trusts: Several thousand dollars if trust disputes arise requiring court resolution.
A knowledgeable trust lawyer can provide a more accurate estimate based on your unique situation. Do your due diligence when choosing legal counsel to ensure you get excellent service at a fair price.
How an Estate Lawyer Could Help
An experienced estate planning attorney can provide tremendous value in designing and implementing an effective trust strategy. Here are some of the key benefits of working with a trust lawyer:
- Explain the pros and cons of various trust options and how they align with your goals.
- Ensure your trust meets all legal requirements under Texas law.
- Customize the trust terms and provisions to provide the protection, control and flexibility desired.
- Draft the trust documents and work with a trustee to properly fund and administer the trust.
- Help position your assets to minimize estate taxes.
- Work with insurance professionals to implement an ILIT.
- Resolve any trust disputes or changes needed through court proceedings.
- Answer questions and support you through the entire trust creation and execution process.
Choosing the right types of trusts is a key part of estate planning in Texas. With an experienced estate planning lawyer guiding you, you can have confidence that your trust will be properly structured and implemented to benefit your beneficiaries significantly.
Key Takeaways
- Trusts can minimize estate taxes, avoid probate, and protect assets when thoughtfully created and funded as part of an estate plan.
- The main types are revocable (changeable), like living trusts and irrevocable (unchangeable) like special needs trusts.
- Popular Texas trusts include living trusts, ILITs, special needs trusts, and spendthrift trusts.
- Work with a knowledgeable estate planning attorney to choose the right trust or combination of trusts for your needs and goals.
Trusts are a powerful tool in estate planning, offering numerous advantages from tax savings to probate avoidance. By understanding the various types of trusts available in Texas and how they can fit into your estate plan, you can better prepare for the future and ensure your assets are managed and distributed according to your wishes.
