What a Trust Actually Does and What It Doesn't
A trust is a legal arrangement in which assets are held by one party the trustee for the benefit of another the beneficiary according to terms the person who created the trust (the grantor) set in the trust document. That single sentence covers an enormous range of structures, objectives, and planning strategies, and the word "trust" is used so broadly that it is nearly meaningless without more context.
Most people have heard that a trust avoids probate. That is true of a revocable living trust but it is not the primary reason most sophisticated estate plans use one. Trusts are tools for controlling how, when, and to whom wealth transfers; for reducing or eliminating estate and gift taxes; for protecting assets from creditors and divorcing spouses; for providing for beneficiaries who cannot manage assets themselves; and for accomplishing charitable objectives in a tax-efficient way.
The trust structure that serves you depends entirely on what you are trying to accomplish. A revocable living trust and an irrevocable life insurance trust are both "trusts," but they serve entirely different purposes and involve entirely different legal and tax mechanics. Montgomery Legal starts with your goals not with a default document and works backward to identify the structure that fits.
Because your advisor is both an attorney and a CPA, the drafting and the tax analysis are not separate engagements. The income tax treatment of trust assets, the estate and gift tax consequences of different funding strategies, and the basis planning implications of holding appreciated assets inside various trust structures are evaluated alongside the legal design not handed off to an accountant after the documents are signed.
Revocable Living Trusts
The revocable living trust is the foundation of most comprehensive estate plans. It is created during your lifetime, holds your assets while you are alive, and distributes them according to your instructions after death without going through probate. You retain full control over the trust and its assets during your lifetime and can amend or revoke it at any time as long as you have legal capacity.
A revocable living trust avoids probate because assets held in the trust are not part of your probate estate they pass directly to beneficiaries according to the trust's terms without court involvement. In Texas, probate is generally more streamlined than in many other states, but it still creates a public record, takes time, and involves court costs. A trust eliminates all of that.
Beyond probate avoidance, a revocable living trust provides incapacity planning that a will cannot. If you become unable to manage your affairs, your successor trustee steps in immediately no court guardianship required. And if you own real estate in multiple states, a trust avoids the need for ancillary probate proceedings in each state where property is located.
For business owners, the revocable trust also serves as a holding structure for business interests, ensuring that ownership transfers seamlessly and that the operating agreement's restrictions on transfer are coordinated with the trust's terms.
- Can be amended or revoked at any time
- Avoids probate on all funded assets
- Keeps estate distribution private
- Provides seamless incapacity management
- Assets included in taxable estate no estate tax benefit
- No asset protection from creditors during your lifetime
- Treated as a grantor trust no separate income tax return required
Sub-trusts that spring from a revocable trust at death
A revocable trust does not simply distribute assets outright at death. It can and for many families, should continue as one or more sub-trusts that hold assets for beneficiaries under specific terms. Common examples include the following.
- Marital trust (QTIP or outright): Provides for a surviving spouse while controlling where assets ultimately pass important in blended family situations or where one spouse wants to ensure assets reach children from a prior relationship.
- Children's trust: Holds assets for minor or young adult beneficiaries until they reach an age typically 25, 30, or staggered where the trustee determines they are prepared to manage them. Prevents large inheritances from being delivered to an 18-year-old.
- Spendthrift trust: Restricts a beneficiary's ability to assign their interest to creditors. Standard language in most trusts, but particularly important for beneficiaries with creditor risk, addiction issues, or a pattern of financial instability.
- Special needs trust: Provides for a beneficiary with a disability without disqualifying them from Medicaid, SSI, or other government benefits. Requires precise drafting a poorly structured provision can accidentally disqualify a beneficiary from benefits they depend on.
Irrevocable Trusts
An irrevocable trust is one that, once funded, generally cannot be amended or revoked by the grantor. That loss of control is precisely what produces the legal and tax benefits by relinquishing ownership of the assets, the grantor removes them from their taxable estate, from the reach of certain creditors, and from the probate process. Irrevocable trusts are planning vehicles for people who have made deliberate decisions about transferring wealth and are willing to give up control in exchange for the benefits that follow.
There are many types of irrevocable trusts, each designed to accomplish a specific objective. The right choice depends on what you are trying to transfer, to whom, over what time horizon, and under what tax circumstances. Below are the structures most commonly used by the clients we serve.
Irrevocable Life Insurance Trust (ILIT)
Life insurance death benefits are includable in your taxable estate if you own the policy at death. An ILIT holds the policy outside your estate, ensuring the proceeds pass to beneficiaries free of estate tax. Commonly used to provide liquidity for estates with illiquid assets including business interests that may generate a tax liability the estate cannot otherwise pay without a forced sale.
Spousal Lifetime Access Trust (SLAT)
Allows one spouse to transfer assets out of their taxable estate using their lifetime gift tax exemption while the other spouse retains indirect access to the trust assets as a beneficiary. A popular vehicle for taking advantage of the elevated federal estate and gift tax exemption. Requires careful design to avoid reciprocal trust challenges.
Grantor Retained Annuity Trust (GRAT)
The grantor transfers assets into the trust and retains an annuity payment for a fixed term. At the end of the term, any appreciation above the IRS's assumed rate of return passes to beneficiaries gift-tax-free. Particularly effective for assets with high growth potential such as business interests ahead of a liquidity event where the appreciation far exceeds the hurdle rate.
Qualified Personal Residence Trust (QPRT)
Transfers a primary residence or vacation home to heirs at a reduced gift tax value by retaining the right to live there for a fixed term. At the end of the term, ownership transfers to beneficiaries removing the full value of the residence from the taxable estate at a fraction of its actual transfer value.
Intentionally Defective Grantor Trust (IDGT)
A trust that is intentionally "defective" for income tax purposes meaning the grantor pays income tax on trust earnings but outside the grantor's estate for estate tax purposes. Used for installment sales of business interests and other assets, allowing appreciation to pass out of the estate while the grantor's payment of trust income taxes constitutes a tax-free gift to the trust.
Dynasty Trust
A long-term irrevocable trust designed to hold wealth across multiple generations shielded from estate tax at each generational transfer and from creditors and divorcing spouses of beneficiaries. Texas has favorable rules for dynasty trusts, including a long perpetuities period that makes them particularly effective when established here.
Third-Party Special Needs Trust
Established by a parent, grandparent, or other third party for the benefit of a person with a disability. Provides supplemental support education, travel, recreation, personal care without disqualifying the beneficiary from Medicaid or SSI. Distinct from a first-party special needs trust funded with the beneficiary's own assets.
Domestic Asset Protection Trust (DAPT)
A self-settled trust that allows the grantor to be a discretionary beneficiary while potentially shielding assets from future creditors. Texas does not currently have a DAPT statute, but Texas residents can establish DAPTs in states with favorable laws. Requires careful planning and timing does not protect against existing creditors.
A note on the federal exemption: The federal estate and gift tax exemption is $15 million per individual for 2026 (about $30 million for many married couples with proper planning), made permanent by 2025 federal tax legislation and indexed for inflation in future years. For estates that may be affected, SLATs, GRATs, IDGTs, and direct gifts lock in the current higher exclusion; completed transfers are not clawed back if the exemption is later reduced. The time to act is before not after the exemption decreases.
Charitable Trusts
Charitable trusts accomplish philanthropic goals while producing income tax deductions, capital gains tax savings, and estate tax reductions often simultaneously. They are not exclusively for the very wealthy; they are appropriate for anyone with a charitable intent, appreciated assets, and an interest in structuring giving in a way that maximizes the benefit to both the charity and the donor's family.
The two primary structures the Charitable Remainder Trust and the Charitable Lead Trust have opposite mechanics: one pays income to the donor first and the remainder to charity; the other pays income to charity first and the remainder to heirs. Choosing between them depends on your income needs, your estate tax situation, and the timing of your charitable intent.
Charitable Remainder Trust (CRT)
The grantor (or another named beneficiary) receives an income stream for a fixed term or for life. At the end of the term, the remaining trust assets pass to one or more designated charities. Particularly effective for donors with highly appreciated, low-basis assets the trust can sell the asset without immediate capital gains tax and reinvest the proceeds in a diversified portfolio.
- Immediate charitable income tax deduction on present value of the charitable remainder
- Avoids immediate capital gains on sale of appreciated assets
- Removes asset from taxable estate
- CRATs pay a fixed dollar annuity; CRUTs pay a fixed percentage of trust value annually
Charitable Lead Trust (CLT)
The charity receives an income stream for a fixed term. At the end of the term, the remaining trust assets pass to the grantor's heirs often with little or no gift or estate tax. CLTs are most effective in low-interest-rate environments and for grantors who want to pass assets to heirs at a reduced transfer tax cost while supporting charitable causes in the near term.
- Reduces or eliminates gift and estate tax on transfer to heirs
- Charitable income tax deduction available in grantor CLT
- Any growth above the IRS hurdle rate passes tax-free to heirs
- CLATs pay fixed annuity to charity; CLUTs pay fixed percentage of trust value
Donor-Advised Fund (DAF)
Not technically a trust, but a closely related charitable vehicle that allows the donor to make a contribution, take an immediate income tax deduction, and recommend grants to charities over time. DAFs are simpler and less expensive than private foundations, accept appreciated assets, and allow time to decide which charities receive grants. We coordinate DAF contributions as part of integrated tax and estate planning.
- Immediate deduction even if grants are distributed over multiple years
- Avoids capital gains on contribution of appreciated assets
- No minimum distribution requirement (unlike private foundations)
- Contributions are irrevocable cannot be returned to the donor
Private Foundation
A more formal charitable structure for families with significant philanthropic goals and the desire for control over grantmaking. Requires ongoing administration, mandatory annual distributions, and compliance with complex private foundation rules but provides the family with a permanent philanthropic vehicle and a level of involvement in charitable activities that DAFs cannot replicate.
- Charitable deduction on contributions (subject to AGI limits)
- Full family control over grantmaking and investment
- Must distribute at least 5% of assets annually
- Subject to excise tax on net investment income and self-dealing rules
Trust Structures at a Glance
The following table summarizes the key legal and tax characteristics across the most commonly used trust structures. Use it as a reference point your specific situation will determine which combination of tools is appropriate.
| Trust Type | Probate Avoidance | Estate Tax Reduction | Asset Protection | Income Tax Deduction | Revocable |
|---|---|---|---|---|---|
| Revocable Living Trust | Yes | No | No | No | Yes |
| ILIT | Yes | Yes removes policy proceeds | Limited | No | No |
| SLAT | Yes | Yes uses exemption now | Limited | No | No |
| GRAT | Yes | Yes transfers appreciation | No | No | No |
| QPRT | Yes | Yes removes residence | No | No | No |
| IDGT | Yes | Yes outside estate | Depends on structure | No | No |
| Dynasty Trust | Yes | Yes multigenerational | Yes for beneficiaries | No | No |
| CRT | Yes | Yes removes asset | No | Yes partial deduction | No |
| CLT | Yes | Yes reduces transfer tax | No | Grantor CLT only | No |
| Special Needs Trust | Yes | Depends on structure | Yes for beneficiary | No | No |
Understanding the Roles in a Trust
Every trust involves at least three roles: the grantor who creates it, the trustee who administers it, and the beneficiary who benefits from it. In a revocable living trust during your lifetime, you typically occupy all three roles simultaneously. After death or incapacity, successor trustees and designated beneficiaries take over. Understanding who fills each role and choosing those people or institutions carefully is as important as getting the document right.
The Person Who Creates the Trust
The grantor establishes the trust, transfers assets into it, and defines its terms. In a revocable living trust, the grantor typically serves as trustee during their lifetime and retains full control. For irrevocable trusts, the grantor gives up control at the point of funding in exchange for the legal and tax benefits the structure provides.
The Person Who Administers the Trust
The trustee holds legal title to trust assets and manages them according to the trust document and the fiduciary duties imposed by Texas law including duties of loyalty, prudent investment, impartiality, and accounting. Choosing the right trustee is critical: they must be financially competent, trustworthy, and willing to serve in what can be a demanding and long-term role. Corporate trustees (banks, trust companies) offer continuity and professional administration but charge fees and may be less familiar with the family's specific circumstances.
The Trustee Who Takes Over
Named in the trust document to serve as trustee if the original trustee dies, resigns, or becomes incapacitated. For a revocable living trust, the successor trustee steps in when the grantor-trustee can no longer serve providing seamless asset management without court involvement. For irrevocable trusts, the initial trustee may not be the grantor, but a successor trustee should always be named in case of vacancy.
The Person Who Benefits
Beneficiaries hold equitable title to trust assets and have the right to receive distributions according to the trust's terms. A trust typically distinguishes between income beneficiaries (who receive current income) and remainder beneficiaries (who receive the principal at the end of the trust term or upon specified conditions). Beneficiaries can also hold powers of appointment that allow them to redirect the trust's ultimate distribution within limits the grantor defines.
An Optional Oversight Role
An independent third party given specific powers in the trust document typically the ability to modify trust terms in response to changes in tax law, remove and replace trustees, or veto certain trustee actions. Trust protectors are increasingly common in long-term irrevocable and dynasty trusts where flexibility over decades matters. In Texas, trust protector powers can be tailored narrowly or broadly depending on the grantor's objectives.
An Optional Governance Mechanism
In larger or more complex trusts, a distribution committee separate from the trustee may be given authority over discretionary distribution decisions. This separates administrative and investment functions from distribution decisions, which can reduce conflicts of interest and provide an additional check on the use of trust assets. More common in institutional or dynasty trust structures.
Funding a Trust: Where Plans Most Often Fail
A trust that is not funded is a legal document with no assets inside it. It avoids nothing, protects nothing, and accomplishes nothing but it cost real money to create and created the impression that planning was done. Trust funding is the process of actually transferring assets into the trust, and it is the step most commonly skipped or incompletely executed.
At Montgomery Legal, trust funding is not an afterthought. It is a distinct phase of every trust engagement, handled with the same care as the drafting itself. We coordinate every category of asset real estate, financial accounts, business interests, and beneficiary designations to ensure the trust actually operates as designed.
Real Estate
Real property is transferred into the trust by executing and recording a new deed naming the trust as grantee. In Texas, this is typically done with a Special Warranty Deed or a Trustee's Deed. We prepare the deed and coordinate recording with the appropriate county clerk. If property is mortgaged, we review the loan documents for due-on-sale provisions, though most residential mortgages are exempt under the Garn-St. Germain Act.
Financial Accounts
Bank accounts, brokerage accounts, and investment accounts are retitled to the trust by contacting each financial institution and completing their trust retitling forms. Retirement accounts (IRAs, 401(k)s) are generally not retitled into a trust during the owner's lifetime they pass through beneficiary designation but the trust may be named as a beneficiary with careful structuring to preserve stretch rules.
Business Interests
LLC membership interests and corporate shares are transferred to the trust by assignment and, where required, by amendment to the entity's ownership records. For closely held businesses, we review the operating agreement or shareholders' agreement for transfer restrictions or right-of-first-refusal provisions that must be addressed before or alongside the transfer.
Beneficiary Designations
Life insurance, annuities, and retirement accounts pass outside the trust through beneficiary designations. We review all existing designations and recommend updates that align with the overall estate plan including whether the trust should be named as primary or contingent beneficiary, and whether a standalone retirement trust is appropriate for large IRA balances.
Personal Property
Tangible personal property vehicles, jewelry, art, collectibles can be transferred to the trust by an Assignment of Personal Property, a simple document that transfers ownership without requiring individual retitling of each item. For high-value items, separate appraisals and insurance rider updates may be needed.
Ongoing Maintenance
Assets acquired after the trust is funded must be titled directly into the trust at the time of acquisition. A pour-over will serves as a backstop directing any assets that were not funded into the trust during the grantor's lifetime to pour over at death but it requires probate. The goal is to fund comprehensively so the pour-over will is never needed.
