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This article describes a basic living trust (also called an "intervivos trust"), which is a specific kind of trust designed to hold  real property (primarily the homestead) during the life of the trustor in order to avoid probate and reduce estate/inheritance taxes at the time of the trustor's death.  A transfer into a trust also has anonymity benefits that contribute to asset protection, since recorded title to property can be held in the name of the trust.  

A living trust of this type should be distinguished from other kinds of land trusts – for example, a pure anonymity trust that has no probate objectives, or an investor trust that contemplates a transfer of ownership of non-homestead property by means of an assignment of beneficial interest. These other trusts are discussed at length in a companion article on this site entitled Land Trusts in Texas.

The living trust is a tried and true means of avoiding probate court and, if the trustor is married, skipping a potential taxable event upon the death of his or her spouse.  Tax implications change continually, so consult with your tax advisor to determine the actual effects in your case.  Not that this office does not give tax advice.

A living trust for the homestead is an excellent way to achieve a variety of positive results and should be considered (along with a "pour over" will) as part any fundamental estate plan. It is critical, however, that such trusts be properly drafted so as not to restrict the trustor's access to and use of trust assets during the trustor´s lifetime.

A checklist of information needed to draft the trust is included at the end of this article.

The person creating the trust is called the "trustor" or "grantor." This is the person who conveys property into the trust.  A trustee is appointed who directs trust affairs on behalf of the primary beneficiaries (usually the trustor and spouse) and, upon the death of the last primary beneficiary, on behalf of one or more remainder beneficiaries (usually the trustor´s children).  Since title remains in the trust as these various persons die, the surviving remainder beneficiaries "inherit" the trust property upon the death of the last surviving parent – but without probate or other involvement by courts or lawyers. 

The document that creates the trust is called a trust agreement or declaration of trust.  It should state the trust´s purpose in general terms along the following lines: "to hold, preserve, maintain, and distribute the Trust Property for the benefit of the Beneficiaries, including but not limited to payment of expenses for their respective health, education, maintenance, and support as the Trustee, acting in his or her sole discretion, deems reasonable, prudent, and necessary."

Statutory authority for creating trusts is contained in the Texas Trust Code, which is contained in Chapter 101of the Property Code. The trust agreement may expand upon or limit these statutory provisions. 

The trustee is charged with management of the trust and has the authority to act on its behalf.  Texas law confers wide powers upon the trustee - including selling and purchasing trust property. Usually, the trustee is same person as the trustor. It is possible to name co-trustees (e.g., husband and wife) and this is recommended to provide for a smooth succession in the event one spouse dies. Even if co-trustees are named, a successor trustee should also be designated in the event the last trustee becomes unable or unwilling to serve. 

The trustor should reserve the right to revoke or amend the trust. The terms of the trust are therefore not finally fixed until the trustor dies, at which time the trust becomes irrevocable and the remainder beneficiaries automatically succeed to the trustor's interest. No deed or probate is required at that time. This results in an enormous saving of time, effort, attorney´s fees, and court costs. 

Trust property may include any type of property, whether personal or real, tangible or intangible. Additional property may be transferred into the trust at a later date, after the trust is established. The trust need not assume existing liabilities on trust property in order for the transfer to be effective. Property can be taken "subject to" existing indebtedness (i.e., without the trustee taking any liability for the debt), or such indebtedness can be "wrapped" (See our article Wraparound Transactions in Texas).

Real property is conveyed into the trust by general or special warranty deed (see our companion article Deeds in Texas for an explanation of the difference), which is recorded in the county real property records. The deed should make certain specific recitals concerning the homestead nature of the property. Conveying the property by deed into the trust is an essential part of the process.

The trust agreement, however, is not and should not be recorded.  It is a private and confidential document. Its terms need not even be disclosed to the remainder beneficiaries.  A brief "Summary of Trust Terms" (or document with a similar title) is occasionally prepared to give to third parties if necessary.

The traditional way for a trust to hold property is in the name of "John Jones, Trustee;" however, it is just as feasible to hold title in the name of the trust – e.g., the "123 Oak Street Trust." You may or may not choose to add a clause as follows: "acting by and through John Jones, its Trustee" – it is an anonymity issue. Note that County clerks have no problem recording a deed into the name of a trust without expressly naming the trustee so long as the trustor´s/grantor´s signature is properly acknowledged. The real-world consequence of titling trust property without expressly naming the trustee is that a title company will ask to see the trust agreement before insuring a subsequent transaction. This is not a problem so long as a properly drafted trust agreement exists (as it should).

Note that transferring property into trust does not reduce a trustor´s assets for Medicaid purposes.  Trust property is still counted by Medicaid as belonging to the trustor.

Since a living trust is a revocable and amendable instrument, it is recommended that one not procure a tax identification number for the trust or attempt to file separate trust tax returns (This is more often done for irrevocable trusts). Forming the trust should not affect how the trustor currently files a federal income tax return; however, this firm does not give tax advice. Consult your tax advisor to determine what is best for your specific circumstances.  Generally, a client is best served if he consults both a capable attorney and a good C.P.A.

What exactly is a due-on-sale clause, and does it represent a problem for living trusts? A due-on-sale clause enables a lender, at its election, to accelerate a note in the event the property or any interest in the property is sold or transferred. Note that there is no such thing as Abreaching or Aviolating a due-on-sale clause.  This is an enabling clause that gives the lender the option of acceleration if the lender chooses to do so. Generally speaking, if a transaction involves a title transfer without prior consent of a lender that holds a note and lien on the property, then the risk of acceleration is present if the lender=s deed of trust contains a due-on-sale clause and the lender=s prior consent is not obtained. 

However, in the case of living trusts for the homestead, there is an express exception to due on sale. Here's how the typical due-on-sale clause (found in paragraph 18 of the Fannie Mae/Freddie Mac Uniform Deed of Trust) is worded:

What is Aapplicable law? The relevant statute is the Garn-St. Germain Depository Institutions Act (U.S.C. Title 12, Chapter 13, Sec. 1701j-(d) which reads in part:

This is the federal living trust exception, which was intended to create an exception to enforcement of due-on-sale clauses in connection with transfers of property to family trusts designed to avoid probate (Note that this exception is not intended to apply to investor trusts dealing with non-homestead property). More detail on this subject is contained in our companion article, Due on Sale in Texas.

It is good practice for the trustor to execute a last will and testament that contains "pour over" provisions designed to convey into the trust any property that was not previously designated as trust property.  In this way, the trust and the will work together as part of an overall estate plan.  It is also possible to have life insurance paid directly to the trust.  This may be advantageous for purposes of paying off liens on the homestead.

Note that if and when the property is sold out of the trust (usually after the death of the trustor) the title company will probably want to see the trust agreement. Once again, it is important that the trust be properly drafted so a Texas title company will accept it as valid.  Otherwise, the title company will likely ignore the trust altogether and require signatures from all persons having an actual or potential interest in the property or, in the alternative, a judicial determination of heirship – either of which can be a hassle and defeat the purpose of creating the trust in the first place. 

It is astonishing how many title companies are ignorant of basic trust law and practice.  It is occasionally necessary for the trustor´'s attorney to discuss the trust with the title company closer or attorney in order to educate him or her as to the nature and effect of the trust.  This is another powerful reason to have a knowledgeable attorney working on your behalf.  No internet service can or will do this.

To facilitate a title company's cooperation, the trust agreement should include release and indemnity language that a title company may rely upon in issuing title insurance.  In rare cases, if all of the foregoing measures have been unsuccessful in obtaining a title company's cooperation, it may be necessary to change title companies.  For more information on the services provided by title companies, see our companion article entitled Title Insurance in Texas.

Clients often call and ask for a "standard" trust – or worse, a fill-in-the-blank form – neither of which exists at any acceptable level of quality, and that includes "trust kits" available on the internet.  Anything is this category is junk. There is no substitute for the analysis and advice of a competent professional in this complex area of the law, especially when it comes to making the trust effective in a state like Texas where there are unique and specific laws relating to homestead property. 

The challenge for the attorney is to discover what the client is trying to achieve and then tailor a document to suit specific needs. That does not mean that the client must pay high legal fees. Effective, customized trusts are available from this office beginning at $550.  The warranty deed into the trust is not included – the fee for a deed is $175 exclusive of the per-page recording fees charged by the county clerk (this varies across Texas). Note that all fees are subject to change – go to "Fees & Policies" at LoneStarLandLaw.com.

It is also useful to have an attorney to assist with changes in trust property or amendments to trust provisions that may occur over the years after the trust is established – especially if one homestead is exchanged for another or if the names of beneficiaries change. Trust maintenance over the years can be as important as trust formation.   

Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article.  This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright 8 2012 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com.

Please complete this checklist and send it to us for preparation of the trust.  It is suggested that you first read our article Living Trusts in Texas which can be found at www.LoneStarLandLaw.com.  Much customization is possible in drafting these trusts, so try to be specific about your instructions.  There is a space for filling in any special requirements you may have. Please use email as much as possible to avoid phone tag. The address is LoneStarLandLaw@aol.com. 

While living trusts can be used flexibly, and there are a number of ways to write these trusts, there are certain structural items that do not

In order for us to draft your trust, we will need to know what persons/entities you want in each role. Make sure that the names you give us are the exact way these persons will sign the trust documents – including middle initials, "Jr.," etc.  Note that the same person cannot serve as Trustor, Trustee, and Beneficiary – or the trust disappears as a matter of law according to the doctrine of merger.  Read our article Land Trusts in Texas for more details.

Legal fees of $550 must be paid in advance.  Payment options are at "Make Payment" on the website.

If you wish us to create a deed conveying the property into the trust – and this is an essential part of this two-step process – then please email a copy of the existing warranty deed or fax it to (832) 201-5321.  The fee for deed preparation is $175 exclusive of county clerk filing fees which vary across Texas.