How to Create a Living Trust in 5 Simple Steps
Estate planning conversations often circle back to that mysterious legal entity – the living trust. If you’re a Texas resident considering estate planning, you may have heard about these tools and wondered if one is right for you.
A living trust can be a powerful legal tool with many benefits, allowing you to avoid probate, spare your family headaches, and even minimize taxes under the right circumstances.
While living trusts have some complex legal aspects, most people really just want the basics – what are these documents in reality, and how do I create one?
Lucky for you, creating a living trust distills down to 5 essential steps when structurally sound guidance lights the way. In this blog, we unlock the secrets to forming this powerful part of your legacy plans through simplified actions bringing legal terminology down to earth.
What is a Living Trust, and How Does It Work?
A living trust is a legal estate planning document created during your lifetime “inter vivos” rather than at your death like a will. It allows you to place assets like your home, investments, or personal property “into trust” (a separate entity) to be managed by a trustee for the benefit of trust beneficiaries.
Unlike a will, which only goes into effect at your death, you can use a properly executed and funded Texas living trust to manage your assets while you’re still alive. This feature can be helpful, especially if you become incapacitated due to an illness or injury.
Parties In a Trust Arrangement
There are three main parties in a basic living trust arrangement:
Grantor – This is you, the person creating the trust. You determine the terms and conditions, name a trustee, and designate beneficiaries. You can name yourself as the trustee if desired.
Trustee – The trustee manages the assets placed inside the trust according to the trust agreement. Successor trustees take over if the first trustee dies or can no longer serve.
Beneficiaries – The people or organizations who receive assets from the trust. You designate primary and contingent beneficiaries.
Once you draft, execute, and fund assets into the trust, you officially give up individual ownership and control over the property. Under Texas law, the trustee has a fiduciary duty to manage and distribute trust assets in your best interests and only as legally allowed.
This separation of asset ownership and control makes trusts powerful estate planning vehicles.
Benefits of Setting up a Living Trust in Texas
Living trusts offer several advantages that make them a popular choice for estate planning in Texas, including:
Avoiding Probate
The primary benefit is avoiding probate for property transferred into your living trust, simplifying estate matters after your passing. The court-supervised probate process can be quite lengthy and costly in Texas. It also makes all your assets public record, exposing sensitive financial information.
Property left in your will must go through probate before beneficiaries can access it. A living trust lets you ensure that the property it holds can circumvent this process entirely after your death. A probate lawyer will guide you through the probate process in Texas.
Privacy
In most situations, living trusts are much more private than probated wills since they allow you to avoid court involvement after death. Only the trustee and beneficiaries know your trust’s details and contents.
Possible Tax Savings
Certain types of trusts, like irrevocable income or property trusts, can minimize estate taxes when properly structured. Our trust lawyers can advise if any tax planning trusts may benefit your specific situation.
While Texas does not have a state estate or inheritance tax, you could still face federal estate taxes without proper planning. Even revocable living trusts may allow for some tax savings at the margins.
Managing Your Affairs If Incapacitated
Unfortunately, many of us may become incapacitated by illness or injury before we pass away. Your living trust includes contingency provisions so someone you choose can step in to manage the trust assets when you become impaired. Many Texans find this an invaluable benefit, sparing relatives from court-supervised guardianship of a minor child.
While a will does nothing to help while you are alive, your living trust plan keeps working even if you become incapacitated.
Step-By-Step Guide to Creating a Living Trust in an Estate Plan
If you want greater certainty over what will happen to your assets when you pass away or become incapacitated, read on for step-by-step instructions on making your living trust in the Lone Star State.
Step 1. Choose a Trustee
Start by deciding on an initial trustee to manage trust assets and administer distributions to beneficiaries per the trust agreement. Many Texas grantors name themselves trustees to simplify control and reduce costs during life.
Just be sure to name a successor trustee who can take over handling trust administration if you die or otherwise cannot continue serving – with clear guidance around the trustee succession order spelled out in the agreement.
You also have the option to appoint a corporate trustee, like a trust company or bank, instead of naming friends or family members. This feature costs more but provides neutral, professional asset administration.
Step 2. Designate Beneficiaries
Next, name primary and contingent trust beneficiaries – those who will receive distributions of income, principal, or assets at certain events (like your death) as defined in the trust agreement.
Spouses with joint property often name each other as primary beneficiaries. Children are common choices, too. You can split percentages between multiple beneficiaries.
When naming minors, consider if custodial trusts may be appropriate to provide some oversight of assets until beneficiaries reach an age you deem sufficiently mature.
Step 3. Draft and Execute the Trust Agreement
Now, work with a skilled Texas estate planning attorney with whom you establish a fiduciary relationship to draw up tailored trust documents reflecting your goals.
Documents should cover issues like:
Exact trust property descriptions.
Beneficiary rights to income and principal.
Trustee powers and limitations.
Trust rules around asset management.
Trustee succession order.
Contingency plans if beneficiaries die before you.
Instructions for final asset distribution.
Relying on pre-made, “one-size-fits-all” internet trust forms is extremely risky and not advised. After you execute all necessary documents, your attorney can assist in recording deeds or property titles and storing original documents securely if needed later.
Step 4. Fund the Trust
This vital step involves retitling assets from your name over to the trust ownership. Work methodically through the accounts and property you want to be held in trust, filing the correct paperwork that transfers legal and beneficial ownership.
Remember that any assets not properly transferred into your trust by your death may need to go through probate. Also, fund your trust right away after execution for optimal results. Your attorney can guide you on meeting funding requirements.
Common assets placed into Texas living trusts:
House and other real estate.
Financial and retirement accounts (stocks, bonds. etc).
Artwork, jewelry, collectibles.
Life insurance if avoiding estate tax is desired.
Business shares or ownership stakes.
How Funding a Living Trust Works
A living trust has no real effect until it is “funded” by retitling assets from your personal ownership to ownership by the trust.
Typical steps are:
Open a new bank or brokerage account in the name of the trust.
Execute new deed paperwork to transfer real estate into the trust.
File change of ownership and beneficiary paperwork on financial accounts.
Retitle vehicles and boats by changing registration.
Update property and casualty insurance policies.
Texas law does not require special transfer taxes or filings when you transfer property into or out of a living trust, which keeps costs down.
You must adequately fund your living trust for it to work as intended. Our estate planning attorneys can assist you in doing everything correctly.
Now that you understand the basics of a living trust and its functions, let’s examine why creating one can benefit Texas residents.
Contact us for more information about this critical process.
Step 5. Maintaining and Modifying a Texas Living Trust
Simply signing your living trust documents alone doesn’t finish the process. Proper ongoing funding, management, updates when life changes happen, and responses to notices are critical over the years ahead.
The Trustee’s Key Role
Your hand-picked trustee plays one of the most vital parts in keeping your Texas living trust running smoothly after creating it. The role of a trustee typically includes:
Adding newly acquired property into the trust.
Investing, protecting, and growing trust assets.
Paying taxes and expenses.
Making beneficiary distributions if you become incapacitated.
Wrapping up trust affairs if you pass away.
Signing on as trustee is a major commitment requiring time, diligence, and impartiality in carrying out fiduciary duties.
Modifying Beneficiaries or Assets
Need to change designated beneficiaries or trustee succession details as time goes on? Or do you want to update the property held in trust after creating it?
If you structured your living trust as revocable, you retain total flexibility as a grantor to alter anything whenever you wish. You simply file trust amendments with a Texas estate planning attorney whenever life events impact your plan – marriages, births, relocations, deaths, etc.
Transfer any after-acquired property into the trust to keep it aligned with your current reality.
When The Trust Terminates
Upon the grantor’s death, specific administrative steps must happen before a living trust can wind down and distribute assets, including:
The trustee files final tax returns for trust activity.
Assets appraised to value the estate.
The trustee formally notifies all beneficiaries.
Outstanding debts and expenses are paid.
The remaining property gets distributed to beneficiaries per trust instructions.
The trustee files a termination certificate, legally closing the trust.
At this point, your living trust has protected and passed on your legacy.
Is a Living Trust Right for You?
As you can see, living trusts involve some upfront effort to set up a trust. Still, these trusts provide substantial long-term benefits including incapacity provisions, simplifying your estate. Avoiding probate and court involvement, shielding families from hassles, and even minimizing taxes make them handy estate planning tools for many Texans.
We hope this guide gave you valuable insight into what’s entailed when creating a living trust in the Lone Star State. Your next step is to schedule a consultation with one of the estate planning lawyers at Your Legacy Legal Care to explore whether adding a customized living trust to your plan may be worthwhile.
Trust us to guide you in making better legal decisions, benefitting you and your loved ones for generations to come.
Contact us today to start a conversation. Our team looks forward to assisting with all your Texas estate planning and living trust needs.