Often, the concept of a trust is confusing because the general use of the term is given a wide variety of meanings on television, in newspapers, in legal reports, etc. Likewise, the laws related to trusts vary differently depending on which state in the U.S. you are working with. However, we believe that it may be helpful for you to have a general understanding of how trusts work in Texas. To help illustrate these concepts, we provide the following example:
Example 1: Prior to his death, River Oaks Grandfather created a trust for the benefit of his favorite Grandson. The Trust agreement states that Grandfather was placing $100,000 in trust until Grandson’s 30th birthday. Prior to Grandson’s 30th birthday, the trustee of the trust can make distributions from the trust for his education and for rent for an apartment. Grandfather names his neighbor to be the Trustee of the Trust because the neighbor is an accountant whom Grandfather trusts.
Example 2: A year later, Grandfather dies, and his Will leaves his entire estate in a trust for the benefit of Grandfather’s Son (who is the father of Grandson). The largest asset of Grandfather’s estate was his home, which had a value of $1 million. Grandfather’s Will states that Son has the right to live in the home for the remainder of his lifetime, and upon Son’s death, the house and all of its contents pass to Grandson. Grandfather’s Will names the same accountant neighbor to be the trustee for Son.
In each of the trusts described above, the same concepts exist. Legal title of the $100,000 and the house are given to the Trustee, while beneficial title of the assets is given to Grandson and Son.
The Trustee’s legal title to the property means that he has the right to make decisions about the property and the ability to enforce those decisions. He can decide whether or not to distribute money to Grandson or to refuse a distribution. He is also responsible for making decisions related to the home that Son lives in.
The beneficial title of the trust assets means that Grandson and Son each have the right to enjoy the benefit of these assets. For instance, Grandson is the only person for whom the money in his trust can be used. Every dollar in the Trust will be used for Grandson’s benefit. Likewise, the home in which Son lives is maintained solely for Son’s benefit during his lifetime.
Although neither Grandson nor Son has the right to make decisions related to their trust assets, they each enjoy the benefit of those assets. This separation of the legal title and the beneficial title is the most fundamental characteristic of trusts.
Very often, trusts are used as part of a comprehensive estate plan. Inasmuch as every family has different dynamics, the use of trusts can often be used to help accomplish estate planning goals while not giving full access to certain assets to children or grandchildren who may not have the ability to make appropriate decisions regarding the use of those assets.
Obviously, this explanation of trusts has been simplified somewhat. However, the concepts related to the appropriate use of trusts, the appropriate uses for trusts, provisions that need to be included in trusts to accomplish your goals, etc. are very complex. Before deciding to create a trust, you should consult with your estate planning attorney to ensure that you fully understand the most appropriate use of a trust for your situation. The attorneys at Ford+Bergner LLP are always glad to assist clients with these decisions.