Articles Posted in Trusts

On one hand, being appointed as a trustee for a Houston trust can be something of an honor, as it shows that the grantor of the trust considered you to be a trusted person capable of carrying out the goals of the trust. However, on the other hand, it can also raise concerns, as serving as a trustee is a critical role that can, in some cases, expose a trustee to personal liability in the event they are accused of mismanaging trust assets. Thus, it is imperative that trustees not only understand their duties and how to carry them out but also that they know when they need to outsource certain roles to third-party professionals.

A Trustee’s Duties

Trustees have several duties, most of which are owed to beneficiaries of the trust. Perhaps the most important duty is a trustee’s fiduciary duty to beneficiaries of the trust. A trustee’s fiduciary duty includes the duty to administer the trust in accordance with its terms, preserve and protect the trust assets, and the duty to avoid conflicts of interest.

Administering a Trust in Accordance with Its Terms

Simply put, a trustee must perform their duties in such a way that is consistent with the terms of the trust. For example, if a trust contains an investment policy statement, trustees ensure all investment management decisions comport with the investment policy statement. Thus, even if an investment may be suitable in a trust as a general matter, if the chosen investment disregards the investment policy statement, a trustee may be found in violation of their duties.

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Trusts offer a wide range of estate planning benefits depending on a trust’s structure and its ultimate goals. Of course, one of the primary purposes of estate planning is the preservation and growth of estate assets through the effective use of trusts. However, from the investment management perspective, trusts are only effective to the extent that they are well managed. Thus, it is imperative that those who are considering the creation of a high-value trust take special care in avoiding the most common investment management pitfalls.

Be Careful About Who You Put in Charge

When a grantor creates a trust, they must also name a trustee to oversee the administration of the trust. While selecting a trustee is almost always one of the most important decisions when creating a trust, the factors you should consider when reviewing potential candidates depend on the type of trust, the value of the assets contained in the trust, and your goals in forming the trust.

For example, many grantors name trusted loved ones to manage a trust. This is a workable solution in many cases. However, just because you have someone in your circle who is willing to serve as a trustee doesn’t necessarily make them a good fit. For example, managing a multi-million-dollar trust is very labor intensive and requires the trustee have significant investment experience. While some grantors may have loved ones who can adequately handle these responsibilities, those for whom an obvious choice doesn’t stand out should at least consider naming a corporate trustee. However, it is important to note that corporate trustees are typically much more conservative in their approach than individual trustees.

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In Texas, a revocable living trust, also known as a trust, is a legal entity designed to control one’s assets. Trusts are created when one person, referred to as the trustor, settlor, or grantor transfers a property interest to a trustee to be held for a beneficiary. Trusts creator during the trustor’s lifetime are intervivos or living trusts. Revocable trusts refer to situations where the trustor retains the right to dissolve the trust. On the other hand, irrevocable trusts refer to situations where the trustor does not maintain the power to change or dissolve the trust. In most cases, a revocable trust becomes irrevocable when the trustor passes away. Both revocable and irrevocable trusts provide certain benefits, and it is important for anyone considering a trust to consult with an experienced estate planning attorney to ensure they select the appropriate product based on their family’s needs.

Benefits of a Revocable Living Trust

The most significant benefit of a living trust is that the assets in the trust can pass to the beneficiaries without probate. The Texas probate process is more straightforward than many other states; however, a revocable trust is advisable in certain situations. For example, a revocable trust is recommended for those who:

  • Want privacy during the estate settlement process;
  • Own property outside of the state;
  • Have blended family, business interests, or estate taxes; and
  • Anticipate that someone will contest their estate plan.

Establishing a revocable trust can enhance privacy, avoid probate court, and prevent hefty tax implications. Further, revocable trusts can protect inherited property and assets in the event of a divorce.

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Estate planning requires individuals to take an inventory of and consider what they wish to do with their bank accounts, homes, car, and other personal belongings after they pass. In addition to these contemplations, Texas business owners must undertake strategic decision-making to pass on or dispose of their business interests correctly. Selling a business is a complex endeavor, and many owners focus on the immediate impact of selling their business without considering personal planning or potential beneficiaries.

Understandably, the immediacy of a deal may usurp the owner’s thought of personal planning; however, consulting with an attorney can maximize the owner and their beneficiary’s interests. An attorney can assist business owners in determining their best course of action.

An attorney can help the owner articulate what they need from the sale. Many business owners use the proceeds of a sale to fund their retirement. However, before deciding to sell a business, an attorney can work with a third-party valuation specialist to provide the owner with an accurate market value of their business. This undertaking allows for wealth planning ahead of a formal sale.

When beginning the estate planning process, most people begin with creating a will and other documents like healthcare directives, medical power of attorney, and funeral arrangements. However, they often forget about living trusts, which have many unique benefits. Unlike a will, a living trust allows an individual to transfer assets to loved ones and avoid the probate court process entirely for the assets placed in the trust. Below are some of the most common questions about living trusts, along with answers to these questions.

What Should I Know About a Living Trust?

A living trust allows the creator—also known as the grantor—to transfer assets to beneficiaries after they have passed away without having those assets go through probate, unlike those bequeathed in a will. The grantor still holds ownership to the assets in the trust until they pass away, meaning the grantor can remove or add assets in the trust—or change the named beneficiary—until their death. Once the grantor dies, the assets are distributed to the beneficiary of the trust.

What Assets Should be Placed in a Trust?

There are some assets that estate planning attorneys recommend placing in a trust, and there are some assets and accounts they recommend do not go in a trust. Some assets that people can fund a trust with include financial accounts, like stocks, mutual funds, bank savings accounts, and money market funds. Property, like a title to a house, can also be put in a trust. While individuals may become hesitant about putting such valuable assets in a trust, it is critical to remember that the trust is revocable, and the assets can be removed at any time. Personal property, like family heirlooms, can also be put in a trust. While most people will instead put these items in a will, a will becomes a matter of public record, unlike a living trust.

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Because estate planning laws are constantly changing, individuals often wonder if they should be changing their estate plans or utilizing other strategies. Some of these changes are known—such as the reduction of the federal estate tax exemption in 2026—whereas others are passed by Congress last minute and can be difficult to predict. In order to prepare for these changes, estate planning attorneys have recommended two strategies for some married couples hoping to limit their federal estate tax liability: the spousal portability election and bypass trusts. Below is information about both of these strategies, and how they can be helpful to Texas married couples going through the estate planning process.

What is a Bypass Trust?

A bypass trust allows married couples to not have to pay the estate tax on certain assets after one spouse passes away. When one spouse dies, the assets within the estate are split into two separate trusts: a marital trust, and a bypass trust. For those assets placed in the bypass trust, the surviving spouse does not own those assets but can access the trust and utilize some of the funds within it. Someone must act as the trustee of this trust, it can be the surviving spouse, and ensures the assets are divided appropriately into each trust and that the trust’s assets are being carefully managed. The assets not placed in the bypass are placed into the marital trust, which the surviving spouse can access at any time and use the funds as they see fit.

Bypass trusts are useful for individuals hoping to limit their federal estate tax liability because up to $24.12 million in the bypass trust are not subject to the estate tax. And assets in a bypass trust are not overseen by the probate court process. Similarly, assets in a marital trust are not subject to the estate tax at all.

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Because there are proposed and implemented changes every year to the federal and state tax code, Texans should always be vigilant as to how these changes affect their gifting practices and their estate plans. In many cases, without the assistance of an estate planning attorney, these changes may seem minuscule and not even be noticed. However, newly passed laws may have a major impact on Texans and how they should implement their estate plan—plus changes they can make to take advantage of these changes. Below are some of the proposed changes that may occur in 2022 that Texans should be aware of and strategies to combat these changes.

Reduction to the Estate Tax Exemption

In the past year, there were proposals to reduce the estate tax exemption—meaning, lowering the amount after which individuals will need to pay a tax on their estate. The current amount is $12.06 million; however, this past year, there were proposals seeking to reduce the amount to $3.5 million per individual. If the amount were lowered this significantly in the upcoming year, many individuals who currently will not have to pay an estate tax will be forced to. However, even if this proposal is not adopted this year, the current estate tax law is set to reset in 2026 to $5 million—this is unlikely to be changed. Therefore, individuals should start planning and strategizing now if their estate value is around $5 million. Most of the strategies involve reducing the estate amount below the exemption limit—either by putting funds in irrevocable trusts or gifting it to loved ones or charity.

When individuals think about creating a trust, they often envision the protection of assets that comes along with such a legal entity. However, they may not consider the lawsuits that may be brought in connection with managing the trust. Being the trustee of a trust is a major responsibility, but if the trustee is not acting according to the trust creator’s wishes, legal action may be brought. Below are common questions and explanations about Texas trusts and when legal actions can—and should—be brought against a trustee.

What is a Trust?

A trust is a legal entity that manages assets on behalf of one or more people who are given the assets, called beneficiaries. The individual who manages the assets in the trust is called a trustee. Being a trustee is a time-consuming and critical role, so a person should not take on this position lightly. It can come with benefits—ensuring the assets in the trust are being distributed and managed according to the trust creator’s wishes—but also drawbacks too.

Putting together an estate plan is often a long but well-thought-out process. However, last-minute mistakes can lead to future complications. These last-minute mistakes may be changing a designation in the plan at the last second, taking advice from someone and not consulting with their attorney, or not paying attention to changes to applicable laws. Individuals assume their estate plan is setting them up for the future, but if mistakes are made, then the estate plan may not work as intended. Below are two of the most common estate planning mistakes seen by attorneys, along with steps on how to avoid them.

Not Leaving Enough Assets to Fund a Trust

Many people create a trust as part of their estate plan. A trust allows a third party, a trustee, to distribute funds to a named beneficiary. The creator of the trust will provide specific instructions on how funds—or gifts—are to be disbursed to the beneficiary. But when creating a trust, certain individuals forget to make sure there are enough assets in the trust to pay for what has been intended to be given. Estate planning attorneys recommend putting additional funds in the trust in case assets decrease in value over time. Then, the beneficiaries will still be able to receive the amount intended.

A federal bill working its way through Congress will have dramatic implications for Texans and their estate plans. Once the bill becomes law, some of the estate planning techniques that have assisted Americans with sizeable estates will no longer be available. Fortunately, there is still time for Houston residents to take advantage of several favorable laws still in place.

Changes to the Gift and Estate Tax

Perhaps the most notable change to the law will be a sweeping reduction in the unified credit amount. The unified credit amount for a married couple is currently $12 million. This means that married estate holders can make a combined total of $12 million tax-free transfers in the form of lifetime gifts and transfers upon death.

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