Living Trusts in Texas

Prepared by:
DAVID J. WILLIS
Attorney at Law

Copyright © 2009. All rights reserved.

Living Trusts in Texas

Achieving Probate Avoidance and Anonymity for Asset Protection
by David J. Willis Attorney

Introduction

This article describes a basic living trust (also called an “intervivos trust”), which is a specific kind of trust designed to hold property (primarily real estate) during the life of the trustor in order to avoid probate and reduce estate/inheritance taxes at the time of the trustor’s death. A transfer into a trust also has anonymity benefits that contribute to asset protection, since recorded title to property can be held in the name of the trust.

A living trust of this type should be distinguished from other kinds of land trusts – for example, a pure anonymity trust that has no probate objectives, or an investor trust that contemplates a transfer of ownership by means of an assignment of beneficial interest. These other trusts are discussed at length in a companion article on this site entitled Land Trusts in Texas.

The living trust is a tried and true means of avoiding probate court and, if the trustor is married, skipping a potential taxable event upon the death of his or her spouse. Tax implications change continually, so consult with your tax advisor to determine the actual effects in your case. Not that this office does not give tax advice.

Creating the Trust

The person creating the trust is called the “trustor” or “grantor.” This is the person who conveys property into the trust. A trustee is appointed who directs trust affairs on behalf of the primary beneficiaries (usually the trustor and spouse) and, upon the death of the last primary beneficiary, on behalf of one or more remainder beneficiaries (usually the trustor’s children). Since title remains in the trust as these various persons die, the surviving remainder beneficiaries “inherit” the trust property upon the death of the last surviving parent – but without probate or other involvement by courts or lawyers.

The document that creates the trust is called a trust agreement or declaration of trust. It should state the trust’s purpose along the following lines: “to hold, preserve, maintain, and distribute the Trust Property for the benefit of the Beneficiaries, including but not limited to payment of expenses for their respective health, education, maintenance, and support as the Trustee, acting in his or her sole discretion, deems reasonable, prudent, and necessary.”

Statutory authority for creating trusts is contained in the Texas Trust Code, which is contained in Chapter 101of the Property Code. The trust agreement may expand upon or limit these statutory provisions.

The trustee is charged with management of the trust and has the authority to act on its behalf. Texas law confers wide powers upon the trustee – including selling and purchasing trust property. Usually, the trustee is same person as the trustor. It is possible to name co-trustees (eg., husband and wife) and this is recommended to provide for a smooth succession in the event one spouse dies. Even if co-trustees are named, a successor trustee should also be designated in the event the last trustee becomes unable or unwilling to serve.

The trustor should reserve the right to revoke or amend the trust. The terms of the trust are therefore not finally fixed until the trustor dies, at which time the trust becomes irrevocable and the remainder beneficiaries automatically succeed to the trustor’s interest. No deed or probate is required at that time. This results in an enormous saving of time, effort, attorney’s fees, and court costs.

Trust Property

Trust property may include any type of property, whether personal or real, tangible or intangible. Additional property may be transferred into the trust at a later date, after the trust is established. The trust need not assume existing liabilities on trust property in order for the transfer to be effective. Property can be taken “subject to” existing indebtedness (ie., without the trustee taking any liability for the debt), or such indebtedness can be “wrapped” (SeeWraparound Transactions in Texas).

Real property is conveyed into the trust by general or special warranty deed (see our companion articleDeeds in Texasfor an explanation of the difference), which is recorded in the county real property records. The trust agreement, however, should not be recorded. It is a private and confidential document. Its terms need not even be disclosed to the remainder beneficiaries.

The traditional way for a trust to hold property is in the name of “John Jones, Trustee;” however, it is just as feasible to hold title in the name of the trust – eg., the “123 Oak Street Trust.” County clerks have no problem recording a deed into the name of a trust so long as the trustor’s/grantor’s signature is acknowledged. In fact, this method is preferable since no individual names are disclosed. The real-world consequence of titling trust property this way is that a title company will ask to see the trust agreement before insuring a subsequent transaction. This is not a problem so long as a properly drafted trust agreement exists.

A “spendthrift clause” should be included that prohibits a beneficiary from assigning his or her interest in the trust to creditors.

Note that transferring property into trust does not reduce a trustor’s assets for Medicaid purposes. Trust property is still counted by Medicaid as belonging to the trustor.

Homestead

The Trust Agreement should contain language that preserves (1) homestead protections available to Trustor pursuant to Art. XVI, Sec. 50 of the Texas Constitution and Texas Property Code Chapters 41 and 42; and (2) any homestead tax exemption currently on file for Trustor. It is prudent to make these recitals even though the 81st Legislature in 2009 added Property Code Sec. 41.0021 stating that transfer of a residence into a “qualifying trust” retains the homestead character of the property.

Federal Income Taxes

Since a living trust is a revocable and amendable instrument, it is recommended that one not procure a tax identification number for the trust or attempt to file separate trust tax returns (This is more often done for irrevocable trusts). Forming the trust should not affect how the trustor currently files a federal income tax return; however, this firm does not give tax advice. Consult your tax advisor to determine what is best for your specific circumstances. Generally, a client is best served if he consults both a capable attorney and a good C.P.A.

Comments on Due-on-Sale Clauses

What exactly is a due-on-sale clause, and does it represent a problem for living trusts? A due-on-sale clause enables a lender,at its election, to accelerate a note in the event the property or any interest in the property is sold or transferred. Note that there is no such thing as Abreaching or Aviolating a due-on-sale clause. This is an enabling clause that gives the lender the option of acceleration if the lender chooses to do so. Generally speaking, if a transaction involves a title transfer without prior consent of a lender that holds a note and lien on the property, then the risk of acceleration is present if the lender=s deed of trust contains a due-on-sale clause and the lender=s prior consent is not obtained. However, there is an exception in the law for living trusts.

The most common wording of a due-on-sale clause is found in paragraph 18 of the Fannie Mae/Freddie Mac Uniform Deed of Trust:

If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lenders prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

What is Aapplicable law? The relevant statute is the Garn-St. Germain Depository Institutions Act (U.S.C. Title 12, Chapter 13, Sec. 1701j-(d) reads:

. . . a lender may not exercise its option [to accelerate the note] pursuant to a due-on-sale clause upon . . . (8) a transfer into an inter vivos trust in which the borrower is andremains a beneficiary and which does not relate to a transfer of rights of occupancyin the property.

This is the federal living trust exception, which was intended to create an exception to enforcement of due-on-sale clauses in connection with transfers of property to family trusts designed to avoid probate. More detail on this subject is contained in our companion article,Due on Sale in Texas.

Pour-Over Will

It is good practice for the trustor to execute a last will and testament that contains “pour over” provisions designed to convey into the trust any property that was not previously designated as trust property. In this way, the trust and the will work together as part of an overall estate plan. It is also possible to have life insurance paid to the trust.

Comments on the “AB Trust”

This article focuses on the benefits available from a basic living trust, which is designed to avoid probate and achieve a measure of anonymity. There is a more complicated version, called an “AB trust,” which sought protection from the federal estate tax under the old tax regime. However, the federal estate tax is currently being phased out, and there will be no estate tax in 2010 - so AB trusts are not as useful as they once were. However, the estate tax will return in 2011 unless Congress acts to extend current law.

For the information of the reader, this is how AB trusts are structured: when one spouse dies, the trust is divided into two separate trusts. This is done in lieu of leaving property outright to the surviving spouse. When this is done, the surviving spouse has the use and enjoyment of the property for life (subject to certain limitations) but does not technically own it and generally cannot sell or transfer it. The result is that federal estate tax is avoided – ie., the property is taxed only once on its way to the children. The drawback is that the surviving spouse has only limited rights to the trust property. Therefore the AB trust may not be suitable for younger couples (say, under 60) who may want to retain all property rights.

The Role of the Title Company

Note that if and when the property is sold out of the trust (usually after the death of the trustor) the title company will probably want to see the trust agreement. Once again, it is important that the trust be properly drafted so a Texas title company will accept it as valid. Otherwise, the title company will likely ignore the trust altogether and require signatures from all persons having an actual or potential interest in the property or, in the alternative, a judicial determination of heirship – either of which can be a hassle and defeat the purpose of creating the trust in the first place.

It is astonishing how many title companies are ignorant of basic trust law and practice. It is occasionally necessary for the trustor’s attorney to discuss the trust with the title company closer or attorney in order to educate him or her as to the nature and effect of the trust. This is another powerful reason to have a knowledgeable attorney working on your behalf. No internet service can or will do this.

To facilitate a title company’s cooperation, the trust agreement should include release and indemnity language that a title company may rely upon in issuing title insurance. In rare cases, if all of the foregoing measures have been unsuccessful in obtaining a title company’s cooperation, it may be necessary to change title companies. For more information on the services provided by title companies, see our companion article entitledTitle Insurance in Texas.

Using an Attorney to Draft and Maintain the Trust

Clients often call and ask for a “standard” trust - or worse, a fill-in-the-blank form - neither of which exists at any acceptable level of quality, and that includes “trust kits” available on the internet. There is no substitute for the analysis and advice of a competent professional in this complex area of the law, especially when it comes to making the trust effective in a state like Texas where there are unique and specific laws relating to homestead property.

The challenge for the attorney is to discover what the client is trying to achieve and then tailor a document to suit specific needs. That does not mean that the client must pay high legal fees. Effective, customized trusts are available from this office beginning at $550. The warranty deed into the trust is not included – the fee for a deed is $175 plus the per-page recording fees charged by the county clerk (usually $28). Simple wills in conjunction with the trust are half the usual fee. All fees are subject to change.

It is also useful to have an attorney to assist with changes in trust property or amendments to trust provisions that may occur over the years after the trust is established. Trust maintenance over the years can be as important as trust formation.

Attached to this article is a checklist that provides the attorney with necessary basic information to begin drafting the trust.

DISCLAIMER

Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright© 2009 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by theTexasBoard of Legal Specialization. More information is available at his web site,.
DAVID J. WILLIS
Attorney at Law

CHECKLIST FOR PREPARATION
OF LIVING TRUSTS
Information for Document Preparation
______

Complete this checklist and send it to the attorney for preparation of the trust. It is suggested that you first read our article Living Trusts in Texas which can be found at customization is possible in drafting these trusts, so try to be specific about your instructions. There is a space for filling in any special requirements you may have.

Please use email as much as possible to avoid phone tag. The address .

Fees and Costs:

Legal fees of $550 must be paid in advance. Online payment can be made at the website under the “Contact Us” button. Checks should be made payable to David Willis.

If you wish to convey property into the trust, please email a copy of the existing warranty deed or fax it to (832) 201-5321. The fee for deed preparation is $175 plus the county clerk’s per page recording fees (usually $28).

1. What is your purpose in creating this trust?

______probate avoidance/estate planning

______asset protection through anonymity

______other (explain): ______

2. What is the name and mailing address of the trustor (the name of the person or persons who will be conveying the property into trust)? Normally this is/are the name(s) in which the property is currently held, according to the existing deed.

Name: ______

Name: ______

Mailing Address: ______

Phone: ______

Email: ______

3. If the trustor is married, but the property to be put in trust is currently titled only in the trustor’s name, then what is the name of the trustor’s spouse?

______

4. What is the street address of the property to be put in trust,?

______

5. What is the proposed name of the trust? For anonymity purposes we suggest some variation on the address – eg., “The 123 Oak Street Family Trust.”

______

6. What is the name of the trustee (ie., the person who will manage the trust)? If there are going to be co-trustees, then list both names as they should appear on the trust document.

Name: ______

Address: ______

Name: ______

Address: ______

If there are co-trustees, then:

______either trustee may act alone on behalf of the trust.

______both signatures will be required for any trust action.

7. Who is the successor trustee? This is the person will serve if the trustee is deceased, disabled, or declines to serve.

Name: ______

Address: ______

8. Who are the “primary beneficiaries?” Usually these are the trustor and spouse or the survivor therof.

______trustor

______trustor and spouse

Other:

Name: ______

Address: ______

Name: ______

Address: ______

9. Who are the “remainder beneficiaries?” Usually these are the trustor’s children.

Name: ______

Address: ______

Name: ______

Address: ______

Name: ______

Address: ______

10. Special Provisions (anything else the attorney should know?):

______

______

11. Do you have a last will and testament or do you intend to create one? An estate plan is not complete without a will.

______

______

Name of person completing this checklist:
______
Phone: ______Fax: ______
Email: ______
These instructions may be emailed r faxed to (832) 201-5321.