There is a lot of talk these days about Texas Revocable Living Trusts, sometimes referred to as “living trusts”, “revocable trusts”, or RLTs. A question I frequently get form clients in my Houston office is whether a revocable living trust is a good fit for their estate plan. Many times clients have spoken to neighbors or been to a seminar where the speaker touted the advantages of an RLT as a way to protect their assets from creditors, reduce taxes, and avoid probate. So, what I’d like to do is dispel some of the myths about these trusts in a series of blog posts, as well as point out when it might be a good idea to have one as part of your Texas estate plan.
The Basics of a Trust: There are some common terms that need to be understood when discussing trusts. First, there are always at least three parties involved in a trust (although in some circumstances the same person may fill all three roles, and each role may consist of multiple people). First, the person who is putting assets in the trust is referred to as the “grantor” or “settlor”. Second, the person for whose benefit the assets are being held in trust is referred to as the “beneficiary”. Third, the person responsible for managing the assets of the trust in a fiduciary capacity is referred to as the “trustee”. So, essentially, a grantor puts his or her assets into a trust for the benefit of the beneficiaries, and the trustee is responsible for managing the assets and making distributions of trust property to the beneficiaries.
Myth #1: Having a Texas revocable living trust will protect your assets from creditors. As a Houston estate planning attorney, this is the perhaps the most common misconception I hear about an RLT. The truth is that placing your assets in a revocable trust in Texas will not protect them in the event you are sued or if any other creditors seek to gain control of your assets. This is because in a revocable living trust, the same person is usually the grantor, trustee, and the beneficiary (this is often referred to as a “self-settled” trust). While some states do have laws that will allow asset protection for self-settled trusts, Texas is not currently one of them. The reason for this is that these types of trust are revocable, meaning that the grantor can revoke the trust at any time and take back all the assets, meaning that the grantor never actually gives up any control over the assets. So, the law will not allow you to take assets that otherwise would be subject to the claims of a creditor and make them exempt from those claims simply by putting them inside an RLT. Additionally, the trust may be treated for some purposes as a separate entity, for legal the purposes the grantor is treated as the owner of the property. Also, while the grantor is alive, any income tax generated by assets inside the trust is also taxed to the grantor on their individual income tax returns.
This is not to say that revocable living trusts are not ever part of a good Texas estate plan. As will be discussed more fully in future posts, revocable living trusts can be a valuable tool in certain instances, such as when planning for incapacity or if you own real estate outside of Texas. Additionally, there are certain types of irrevocable trusts (meaning that they cannot be revoked) that can provide asset protection in Texas. However, these types of trusts are not what is discussed in this article.
Stay tuned for more posts on common myths regarding Texas revocable living trusts.