Types Of Trusts And Their Benefits & Limitations
This article will help you learn:
- Some of the trusts that are commonly used in Texas, and how they may be beneficial to you.
- The types of trusts that might be useful for higher income situations.
- How a trust can help your loved ones avoid the probate process.
What Are Some Commonly Used Trusts In Texas?
A trust is a contract to hold assets for a person’s benefit, and there are many different types of trusts. At Sheehan Law, we use a variety of trusts, including:
- Revocable living trusts
- Charitable trusts
- Gun trusts
- Pet trusts
- Descendants trusts
- Marital trusts
- Bypass trusts
- And more…
Trying to understand each type of trust and figure out which one is right for you can be confusing. An estate planning attorney can help explain the different types of trusts. One of the most important reasons for working with an attorney is to determine what kind of trusts would be best for your estate plan.
For example, some people have a large number of certain kinds of guns that require special licenses. It’s important to have a gun trust for those. Other people who may be concerned about their pets can write up a pet trust so money is set aside for the care of their pets after their death.
What Are Some Of The Advantages Of A Descendants Trust?
Descendants trusts are a way to hold assets. They allow money to be left to your children, grandchildren, or anyone else you wish to inherit some of your assets. A descendants trust is the safest way to own money. They are a third-party settled trust, meaning that the money goes directly from you to your descendants.
The money is owned by the trust rather than by the descendants, so your child can be their own trustee. This gives them control over their inheritance and the ability to do whatever they want with the funds. However, because they don’t technically own the money, it can’t be taken from them.
Other advantages of descendants trusts are that they don’t become community property and are not subject to division in a divorce. They cannot be reached by creditors or any other kinds of claims other than child support. For these reasons, descendants trusts are excellent tools because they can be customized with your values and built the way you want.
For example, you could customize the trust so that your daughter can be a stay-at-home mom, and you can pay a stipend for this. Or, you can require that your children work through college and only have money matched to what they earn.
Are There Limitations To Trusts In Texas?
For time restrictions, there is a statute of limitations on how long a trust can be in effect. However, this is complicated and applies more to legacy trusts, so it does not come up frequently.
As far as other limitations, a trust can do almost anything you want, as long as it is legal. One example of a specific limitation is that you can’t restrict people from marrying or having children. But you can do almost anything else with a trust within the laws.
What Is The Rule Against Perpetuities?
The rule against perpetuities states that a trust can only exist for ‘a life in being plus 21 years.’ This rule exists to keep us from having money that is kept out of public hands for generations. The government doesn’t want large amounts of wealth to be locked up for hundreds of years in trusts.
The trust can exist for the life of the youngest person who is a beneficiary of the trust, plus 21 years. After that, the trust would have to terminate. However, there are ways to work around this rule if the time limitation is an issue for your situation.
Will I Lose Control Of My Assets In A Trust?
With a revocable living trust, you do not lose control of your assets. You would still have complete control over your assets and have the power to change or terminate the trust at any time.
With an irrevocable trust, you do lose control of your assets. However, those are usually created for particular purposes and are rarely used. An experienced estate planning lawyer can help you determine the right type of trust for you.
Are There Specific Trusts That Are Better For Higher Income Or Higher Asset Planning?
There are specific trusts that are better for higher income or asset planning. For these kinds of trusts, it is especially important to meet with an attorney to figure out what would be most useful for you.
At Sheehan Law, we use marital trusts and bypass trusts in high-income and high-asset planning situations. These types of trusts are asset preservation tools. They provide a way to reduce, or in some cases even eliminate, what must be paid in federal estate taxes.
Depending on your needs, there are other more complicated trusts we can use, such as charitable trusts. Meeting with one of our knowledgeable estate planning attorneys can help you discover what the best options are for you.
Will A Trust Keep My Loved Ones Out Of Court And Litigation?
One of the benefits of a trust is that it is a living document. This means it is reaffirmed every time you write a check on your trust account or transfer an asset in or out of your trust. Every time you sign your name as the trustee, you are reaffirming your trust.
It is much more difficult to challenge a trust than a will. For example, you can challenge the person’s mental state at the time they signed the will. If you can prove the person did not have mental capacity at that moment, you can invalidate the entire will.
A trust is more difficult to challenge because you reaffirm it each time you take action on it. A trust can keep your family out of probate court and reduce the chances of litigation.
Anyone can sue anyone for anything. For this reason, it is difficult to say that we absolutely can prevent litigation, but having a trust in place will reduce the chance that litigation would ever be successful.
Will A Trust Always Avoid Probate?
In general, assets that belong to a trust are not subject to probate, so a trust can help your loved ones avoid probate. However, there are cases where probate might still be necessary.
This usually happens if the person who created the trust does not keep their trust funded. They may buy a trust online or go to a trust mill and get an inexpensive trust, but they are not taught how to keep the trust funded. Keeping the trust funded means making sure that all your assets belong to the trust.
The trust can only pass what it owns. Probate would still be necessary if you have a trust but your assets are not in the name of the trust. For instance, if you create a trust and then buy a new home and don’t put it in the name of the trust, your loved ones might still have to go through probate for the home.
At Sheehan Law, we work hard to help our clients avoid this situation. We try to educate them on the importance of keeping the trust funded so they never have that problem.