Trusts Overview and Principles

A trust is created when the settlor demonstrates an intention to create it.

In a trust, legal title is held by the trustee for the benefit of the equitable titleholder (the beneficiary).

Trust duties must be legally binding, not just moral obligations.

Trust intent must be present at the time of creation, not future plans.

A common-law concept, originally applying to real property, that merged legal and equitable title in the beneficiary, effectively eliminating the trustee's legal interest.

A trust where the trustee has duties beyond just holding the title, also managing the property.

Words expressing a wish or hope, not legally enforceable as creating a trust.

The beneficiary doesn't have to know about the trust for it to be valid.

Allows a subsidiary company to replace an affiliated bank as trustee in mergers, acquisitions, or buyouts, without court approval.

Beneficiaries hold the equitable title to the trust and have the right to sue a trustee for breach of fiduciary duty.

Beneficiaries who are all presently entitled to trust distributions.

Beneficiaries who receive benefits in a certain sequence (e.g., one after another).

A legal entity (like corporations, partnerships, or governments) can hold trust property.

Trust beneficiaries must be clearly identifiable from the trust's written instructions.

A trust that does not benefit a human or a charity.

Generally invalid, as it doesn't have a human beneficiary or charitable purpose.

Trust income that hasn't been classified yet because the beneficiary hasn't demanded it.

If a trust is created before September 1, 2005, a divorce doesn't change the spouse's property interest in the trust.

If a revocable trust names a divorced spouse as a beneficiary, the ex-spouse's share is treated as if they disclaimed.

Trusts executed after divorce, court orders, or explicit trust language regarding divorce aren't impacted.

Someone buying from a divorced spouse isn't liable for the previous beneficiary's rights.

An ex-spouse who gets trust property they don't deserve must repay the property.

Generally, trust property is transferable, but there could be restrictions like life interests or spendthrift clauses.

Mandatory distributions are required, while discretionary distributions depend on trustee's discretion.

A will provision that directs assets to a trust already in existence or created upon the testator's death.

A trust must be in writing and identified in the will to receive assets via a pour-over provision.

Assets cannot be poured over into a trust that has been revoked or terminated.

A trust specifically designed to manage life insurance proceeds upon the insured's death.

Used to protect and manage life insurance proceeds, especially when beneficiaries are minors or disabled.

Provides control over how proceeds are used after death and can create a unified estate plan.

The owner can transfer ownership of a life insurance policy to a trust, making the trust the beneficiary.

Texas law specifically recognizes life insurance trusts and allows them to be beneficiaries of life insurance policies.

A clause in a trust that restricts a beneficiary's ability to transfer or encumber their interest, protecting them from their own financial mismanagement.

Courts can order distributions from a spendthrift trust for child support payments, even if the beneficiary is restricted from accessing the funds directly. The needs of children outweigh the settlor's control over the trust.

A clause that dictates a beneficiary loses their interest in the trust if they fail to comply with certain conditions, such as paying child support.

Forfeiture provisions benefit other beneficiaries by preventing a delinquent beneficiary from jeopardizing the trust funds, securing their interests.

The court can 'look through' a spendthrift provision to order child support payments directly from the trust, even if the beneficiary cannot access the funds.

An agreement between beneficiaries to resolve trust disputes outside of court, allowing them to transfer beneficial interests despite a spendthrift provision.

In some jurisdictions, tort claimants (people who are injured by another's negligence) may have different trust protection rights than traditional creditors.

A trust agreement can allow beneficiaries to transfer their interests even if a spendthrift provision restricts direct access to the funds.

A trustee may need special authority to act in another state, especially when dealing with real estate. They might need a local representative or corporation to handle things there.

Section 025 of the Texas Trust Code allows a trustee to investigate the environmental condition of property before accepting it for the trust.

A trustee can have powers beyond what's explicitly stated in the trust document. These are implied powers necessary to carry out the trust's purpose, as long as they aren't inconsistent with the trust.

A court can modify a trustee's powers. They can either grant additional powers or limit existing powers, depending on the circumstances.

A trustee can delegate certain tasks, like ministerial duties, but generally can't delegate discretionary decisions. This has evolved over time.

This rule allowed trustees to delegate investment decisions to an investment agent. However, the trustee remained responsible for the agent's actions and had to follow specific procedures.

This rule allows broader delegation of investment and management decisions. It focuses on what a prudent trustee would do under similar circumstances.

The traditional rule was strict, only allowing delegation of ministerial duties. Modern rules are more flexible, permitting delegation under certain conditions.

A trust exists if there is a separation of legal and equitable title, even if only a tiny bit.

A trust CANNOT exist if the sole trustee is also the sole beneficiary.

If legal and equitable title both belong to the SAME person, the trust disappears.

As long as legal and equitable title are separated, even slightly, the trustee still has duties to the beneficiary.

Merger usually happens when a trust ends, and the trustee transfers all property to the beneficiaries.

A revocable trust where the settlor, trustee, and lifetime beneficiary are all the same person. This allows the individual to maintain complete control over the property during their life and then have it pass to a designated remainder beneficiary upon death.

The settlor must have the capacity to convey property to create a trust. This means they must be able to make a valid gift during their lifetime (inter vivos) or have testamentary capacity to create a trust in their will.

The property that is held in trust. Any type of property that can be transferred by the settlor can be held in trust.

A settlor can retain legal title (acting as trustee), a life interest, the power to change the trust, and the power to add property to the trust.

A trust ceases to exist. A trust is essentially a way of holding property, and if there is no property, there is no reason for the trust to continue.

A trustee must accept the position or the trust may fail. Acceptance can be implied by actions like taking possession of trust property or exercising powers. If the trustee does not accept, the trust instrument may designate an alternate.

A trustee may need to post a bond, typically from a surety company, to protect beneficiaries from the trustee's potential breaches of fiduciary duty. The bond amount is set by the court. Bonds may be required unless waived by the settlor or if the trustee is a corporation.

Factors that might influence a trustee's decision to accept include compensation, being named as a beneficiary, family relationships, and familiarity with the beneficiaries and property.

Trustees may decline the role due to potential liabilities, concerns about unsuitable beneficiaries, or the complexity and burden of fulfilling fiduciary duties.

In Texas, a majority of co-trustees can act to make decisions concerning the trust, unlike the traditional requirement for unanimous consent.

A trust that lacks a human beneficiary or charitable purpose, like a trust for a pet or a monument, is often invalid. It is not a private trust because it is not owned by a human, and not a charitable trust because it doesn't have a charitable purpose.