Using A Trust To Protect Assets In Texas

In this article, you will learn…

  • About the most common types of trusts,
  • How to protect assets with trusts, and
  • How trusts help you qualify for benefits.

What Are The Most Common Ways To Protect Your Assets During Your Lifetime And After In Texas?

The most common way to protect your assets during your lifetime and after in Texas are trusts. There are a number of types of trusts you can use to protect your assets. The most prominent types of trusts are revocable and irrevocable trusts.

Revocable Trust

A revocable trust can be changed at any time by the creator, or trustor, of the trust during their lifetime. Once the trustor dies, anything that the trustor agreed to give away in the trust will become irrevocable. The surviving trustor can handle any other assets in the trust and make any changes they wish to those assets as long as the deceased trustor didn’t designate those assets to be given away at the event of their death.

While there are many benefits to the revocable trust, such as the ability to make changes to your trust at any time during your lifetime, it is important to understand that a revocable trust does not protect your assets from creditors. If you put a million dollars into your revocable trust and then you open a business that goes $800,000 into debt, creditors can come after your assets to include that million dollars in your trust.

If you can access your assets at any time, you can’t really say that they’re owned by someone else. For example, if you’re able to pull $70,000 out of your trust to pay cash for a new car, there’s no way you can say that you can’t access that money to pay your creditors.

Irrevocable Trust

To protect your assets from creditors, you would need to place them in an irrevocable trust. Of course, you have to decide how much control you want to have over your assets and how important it is to you to protect those assets from creditors. While the irrevocable trust will protect your assets from creditors, it will also limit your ability to touch them.

The revocable and irrevocable trusts are the two overarching types of trusts and they’re called “Inter-Vivos” – which is Latin for ‘during your lifetime’. It basically just means that these are trusts created while you’re alive. Why they need to have a Latin name, I couldn’t tell you. Probate is simply a very ancient old-timey part of the law.

Charitable Trust

There is also a charitable trust as an option to protect your assets from creditors. The charitable trust allows you to put money into a trust that is solely used for charitable purposes. You can fund a…

  • Scholarship,
  • Church,
  • Mission trip, or
  • Any other charitable purpose.

You can put $20,000 into a charitable trust and then you don’t even have to pay taxes on that money, because you’re giving it to charity. The trust may not give that money away for two or three years, but you get that tax write-off today.

Special Needs Trust

A special needs trust, or SNT, is a trust that allows you not to count all of your assets toward eligibility for Medicaid, nursing homes, or other government support programs which impose an asset limit and are contingent upon their financial condition.

For example, most nursing homes have limits of $2,000 accountable assets, $2,600 monthly income, but you’re able to own a home worth up to $600,000 or a car with unlimited value. In order to meet these limits and be eligible for assistance programs – if you don’t want all of your assets going toward paying for health and nursing home costs – you can open a special needs trust.

What you don’t want is to have a trust that gives all of your children equally $3,000 a month for the rest of their lives. If that’s what the trust document says, then that’s what the trustees have to do, and then that person exceeds the monthly income level for Medicaid.

Miller Trust or Qualified Income Trust

If you have a monthly income greater than $2,600, you can create what’s called a “Miller Trust”, or a Qualified Income Trust (QIT). You only put your monthly income in a QIT, not assets such as cars, boats, or property. The trustee of a QIT cannot be the person who gets the money. Instead, the trustee of a QIT sends money directly to the nursing home, for example.

Medicaid says that if you’re in a nursing home, you should only need $60 a month for all of your personal needs. This means that if your monthly income is $2,600, the trust is going to pay the nursing home $2,540 per month. So, there’s your $2,600 used up and every month, that account will grow. If you’re getting $3,000 per month, it would grow to $400 every month.

When you pass away, Medicaid then gets to try to recover at least part of what it has spent on you, because you used sort of a tricky formula to qualify for your income.

Whenever we do revocable or irrevocable trusts, we always include a special needs provision that basically says that if any of the beneficiaries of this trust ever needs public assistance, federal or state income or benefits, then this trust will limit how much it distributes to that beneficiary to the cap that the federal or state program requires. That way, if they’re doing fine, they’re getting $3,000 a month. If they get into a car accident and become physically disabled, or if they have to go to a nursing home, now they’re only going to get $2,600 a month from the trust.

You don’t have to create a Miller Trust or QIT in order to be able to become eligible for benefits, but it’s an option for those that need help qualifying.

Testamentary Trust

A testamentary trust is based on the idea that, in your Will, you want to split your money up to give it to your…

  • Children,
  • Church,
  • Charity, or
  • Any other entity.

If you don’t want to make your executor hang around to distribute the money every month or every year to all of the beneficiaries, you can Will that if anyone is under 25 years old, their share will go into a trust. That trustee shall give each beneficiary the amounts described in your will and when they turn 25–or whatever age you determine–they will get the balance that’s in the gift they receive.

The name ‘testamentary trust’ comes from the fact that your last will and testament creates the trust.

What Happens When You Pass Away Without A Will Or Trust In Texas?

In the state of Texas, if you don’t write your own will or have a trust in place for your assets, the state will dictate how your assets will be distributed. Texas law will determine what your family will get and if your family thought you were going to leave them your house, you’re probably going to have some very unhappy relatives.

You can put virtually anything you want in a trust. You just have to make sure that you describe how the trustee is going to deal with those assets once you’re gone. You want the directions to the trustee to be very clear so that your children or beneficiaries don’t get crosswise with each other.

Are There Legal Limits To What Can Be Done To Protect Your Assets?

There are only legal limits to what can be done to protect your assets if you are essentially trying to hide your assets. For example, if you own a business that is $800,000 in debt, you can’t transfer $2 million to your trust and think that your money is now protected from your business creditors. In fact, that would be a fraudulent transfer.

If you know or believe that you owe $800,000 and you place $2 million in a trust to protect it and that results in you not being able to pay that debt, the creditor can then sue you for a fraudulent transfer and recover the value of what they were owed. They could probably even get legal fees on top of the initial debt for having to prosecute the fraudulent transfer lawsuit.

What Assets Can Be Put In A Trust And What Assets Cannot Or Should Not Be Included In A Trust?

There are very few assets that shouldn’t or can’t be put in a trust. It’s hard to even identify any assets that shouldn’t be put into a trust. Most assets can be put into a trust and you can create what’s called a pour-over will.

A pour-over will is a will that designates certain assets to certain beneficiaries, such as…

  • Your car goes to your son,
  • Your hunting rifles go to your nephew,
  • Your jewelry goes to your wife, and
  • Everything else goes to your trust.

Now the trustee, or the executor of your estate, has a duty to shift title or ownership of all remaining assets into the trust itself. These assets can include…

  • The couch,
  • The television,
  • The boat,
  • The silverware, and
  • Literally everything else.

All of those items would go into the trust and the trustee would then distribute them according to the trust.

For more information on Using A Trust To Protect Assets In Texas, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (281) 843-9723 today.