Texas Trusts
Trusts in Texas are governed by the Texas Trust Code and by federal tax law. Any decision to place any assets in trust must be accompanied with consideration of how the trust will be maintained, how the trust will be treated for tax purposes, and how the trust may be terminated. A trust is created by a settlor, and consists of trust assets and the beneficiaries. There two (2) types of trusts in Texas and most other jurisdictions: revocable trusts and irrevocable trusts.
The Revocable Trust
The revocable trust is a trust by which the settlor may at any time terminate the trust. It is most frequently used to provide management of trust assets for the benefit of others and to place assets of the settlor outside of the public domain. There are few, if any, additional benefits to these trusts since the revocable trust does not provide for tax benefits or creditor protection to the settlor. The revocable trust is generally taxed as part of the settlor's income and requires certain filings with the Internal Revenue Service.The Irrevocable Trust
The irrevocable trust is a trust by which the settlor may not terminate the trust, except under very specific circumstances and requirements. The irrevocable trust is generally taxed separately, it must make filings with the internal revenue service, and it can have provisions to protect assets from creditors. Despite these benefits, these trusts should only be used sparingly.Other Trust Considerations
The most important aspect of trust consideration is tax considerations as part of an overall estate plan. The two (2) trusts most frequently used for this purpose is the bypass or credit shelter trust and the Qualified Terminable Interest Property (QTIP) or marital trust. Each of these trusts must be drafted with consideration of the regulations of the Internal Revenue Service. The Bypass Trust is used to set aside assets in the amount of the federal estate-tax exemption, thereby removing it from the taxable estate. In comparison, the QTIP or marital trust is funded with funds in the estate in excess of the federal estate-tax exemption.With the Qualified Terminable Interest Property (QTIP), the donor/testator is permitted to determine the ultimate disposition of property while still having the transfer qualify for an unlimited marital deduction. This provision is granted by IRC Sec. 2056(b)(7) (devises and bequests) and by Sec. 2523(f) (gifts).