How to Set Up a Living Trust in Texas and What to Include
Learn how to structure a living trust in Texas to ensure clarity in asset management, legal compliance, and future distribution planning.
Creating a living trust can be a strategic way for Texas residents to manage assets, potentially avoid the probate process, and ensure their instructions are followed after death or in case of incapacitation. This arrangement offers control over how property is handled.
State Requirements for Establishment
Establishing a legally valid living trust in Texas requires meeting standards set by the Texas Trust Code. A primary requirement is that the person creating the trust, known as the settlor, must clearly intend to create one, as specified in Texas Property Code Section 112.002. Simply transferring property is insufficient; evidence must show the transfer’s purpose was to form a trust.
The settlor must also have the legal capacity to create the trust. Under Texas Property Code Section 112.007, this generally means being at least 18 years old (or legally married, or in the armed forces) and having a “sound mind” when the trust document is signed, understanding the action’s nature and consequences.
Texas law also dictates the trust agreement’s form. A trust involving real or personal property is typically enforceable only if its terms are in writing and signed by the settlor or an authorized agent, according to Texas Property Code Section 112.004. While a narrow exception exists for trusts of personal property transferred directly to a trustee, a signed written document is standard practice, especially for living trusts holding diverse assets like real estate. Unlike wills, Texas law doesn’t mandate witnesses or notarization for a trust document, though notarization is common for verifying the signature.
Finally, a valid trust must have a lawful purpose and identifiable property. Texas Property Code Section 112.031 permits trusts for any legal purpose, provided the terms don’t require illegal or tortious acts. Additionally, Section 112.005 states a trust needs property (corpus or principal); some asset must be designated as belonging to the trust upon creation.1Texas Legislature Online. Property Code Chapter 112 – Creation, Validity, Modification, and Termination of Trusts
Party Roles and Responsibilities
A Texas living trust involves distinct roles for proper management. The settlor (also called grantor or trustor) creates the trust and contributes the initial assets. In many revocable living trusts, the settlor initially acts as settlor, trustee, and beneficiary, maintaining control during their lifetime. The settlor defines the trust’s terms for asset management and distribution.
The trustee holds legal title to the trust property and manages it according to the trust document and Texas law, primarily Chapters 113 and 117 of the Property Code.2Texas Legislature Online. Property Code Chapter 117 – Uniform Prudent Investor Act A core responsibility is the fiduciary duty owed to the beneficiaries. This requires the trustee to administer the trust in good faith (Section 113.051), act solely in the beneficiaries’ interest (duty of loyalty, Section 117.007), and avoid conflicts like improperly using trust funds or property for personal benefit unless authorized (Sections 113.052, 113.053).3Texas Legislature Online. Property Code Chapter 113 – Administration
Trustees must manage and invest assets prudently, following the “prudent investor rule” (Section 117.004), considering the trust’s purpose and exercising reasonable care, skill, and caution, often involving diversification (Section 117.005). They must keep trust property separate from personal assets (Section 113.056) and maintain accurate records, providing accountings to beneficiaries when required (Section 113.151). Failure to meet these duties can result in personal liability for losses (Section 114.001).4Texas Legislature Online. Property Code Chapter 114 – Liabilities, Rights, and Remedies of Trustees, Beneficiaries, and Third Persons Trustees are typically entitled to reasonable compensation (Section 114.061), though it may be reduced or denied for breach of trust. Living trusts usually name successor trustees to take over upon the initial trustee’s incapacity or death, ensuring continuity.
Beneficiaries are the individuals or entities for whom the trust property is held. They hold equitable title and have specific rights, primarily the right to receive distributions as specified in the trust agreement. They also have rights related to information and accountability, detailed further below.
Asset Transfer and Funding
After the living trust document is signed, assets must be transferred into it – a process called “funding.” This step gives the trust control over the property. Properly transferring ownership from the settlor’s name to the trust’s name is essential for the trust to manage assets during life and avoid probate after death.
Transfer methods depend on the asset type. For Texas real estate, a new deed (e.g., warranty or quitclaim deed) is executed, conveying the property from the settlor individually to the trustee of the trust. Following Texas Property Code Chapter 5 requirements, the deed must describe the property and name the grantee as “[Trustee’s Name], Trustee of the [Name of Trust] dated [Date].” This deed must be recorded in the county’s real property records.
Financial assets like bank and brokerage accounts are transferred by retitling them in the trust’s name. This usually involves contacting each institution, which will have specific forms and procedures, often requiring a copy of the trust agreement or a Certification of Trust (a summary document authorized by Texas Property Code Section 114.086). Account statements will then show the trust as the owner.
Tangible personal property (furniture, jewelry, collectibles without formal titles) is typically transferred using a written “Assignment of Property.” This document lists or describes the items and states the settlor’s intent to transfer ownership to the trust. It should be signed by the settlor and kept with the trust documents, providing written evidence consistent with Texas Property Code Section 112.004. Assets not properly transferred remain outside the trust and may be subject to probate.
Distribution Clauses and Beneficiary Rights
Distribution clauses are central to a living trust, dictating how and when assets pass to beneficiaries. These clauses reflect the settlor’s instructions, guiding the trustee. Settlors can tailor these provisions, structuring distributions as outright transfers, payments at certain ages or milestones, or ongoing support based on standards like “health, education, maintenance, and support” (HEMS). Trustees may be given discretion within these guidelines.
Beneficiaries, the individuals or entities benefiting from the trust (defined in Texas Property Code Section 111.004(2)), have rights to ensure the trust operates correctly. A key right is access to information. Under Texas Property Code Section 113.151, a beneficiary can demand an accounting from the trustee detailing transactions and asset status. This promotes transparency and allows monitoring of the trustee’s actions.
Beneficiaries can also enforce the trust’s terms and hold the trustee accountable. If they believe the trustee is breaching duties, mismanaging assets, or failing to make distributions, they can pursue legal action. Texas Property Code Section 115.001 gives district courts jurisdiction over trust proceedings.5Texas Legislature Online. Property Code Chapter 115 – Jurisdiction, Venue, and Proceedings Any “interested person,” including a beneficiary, can file suit (Section 115.011) to compel trustee actions, demand an accounting, interpret the trust, determine rights, or seek trustee removal (Section 113.082). This judicial oversight helps protect beneficiaries’ interests.
Settlors can include provisions like spendthrift clauses (authorized by Texas Property Code Section 112.035). These generally prevent beneficiaries from transferring their trust interest and shield it from their creditors until funds are distributed. This offers asset protection and aligns with a settlor’s potential desire for managed distributions.
Amendments and Revocations
A key advantage of a living trust under Texas law is its flexibility. Texas Property Code Section 112.051 presumes a trust is revocable by the settlor unless the document explicitly states otherwise. This allows the settlor of a typical living trust to modify its terms or cancel it entirely during their lifetime, adapting to changing circumstances.
To amend a revocable trust, the settlor usually follows procedures outlined in the trust document. If the document is silent, Section 112.051(c) requires modifications to be in writing and signed by the settlor. However, a settlor cannot increase a trustee’s duties via amendment without the trustee’s explicit consent (Section 112.051(b)).
Revoking a trust follows similar principles. The settlor should check the trust agreement for specific instructions. If none exist, Section 112.051(c) requires a written revocation signed by the settlor. The settlor must have the legal capacity to amend or revoke, generally the same capacity needed to create the trust initially (Section 112.007).
This ease of amendment or revocation distinguishes revocable living trusts from irrevocable ones, which are much harder to change, often requiring court intervention under specific circumstances (Texas Property Code Section 112.054). The straightforward process for revocable trusts ensures settlors maintain control over their estate plan throughout life.
Tax Obligations
Understanding the tax implications of a Texas living trust is necessary. For federal income tax, a standard revocable living trust is usually a “grantor trust” (Internal Revenue Code sections 671-679).6Internal Revenue Service. Grantor Trusts Explained The IRS disregards the trust as a separate entity during the settlor’s life; all trust income, deductions, and credits are reported on the settlor’s personal Form 1040 using their Social Security Number. A separate trust tax return (Form 1041) is generally not needed while the trust is revocable.
Texas does not have a state income tax for individuals or trusts, so income generated within the trust is not subject to Texas income tax. While Texas has a franchise tax, typically applied to businesses, most revocable living trusts holding personal assets are not subject to it, especially if grantors and beneficiaries are individuals and the trust isn’t deemed a business trust.
Regarding federal estate tax, assets in a revocable living trust remain part of the settlor’s taxable estate because the settlor retains control. The value of trust assets is included in the settlor’s gross estate at death. Federal estate tax applies only if the total estate value exceeds the federal exemption ($13.99 million per individual for 2025, subject to change). A living trust does not inherently reduce federal estate taxes. Transferring assets to a revocable trust is also not a completed gift for federal gift tax purposes.
Upon the settlor’s death, a revocable trust typically becomes irrevocable. It transitions into a separate taxable entity. The successor trustee must obtain a federal Employer Identification Number (EIN) for the trust.7Internal Revenue Service. Do You Need an EIN? The trust must then file an annual federal income tax return, Form 1041, if it meets income thresholds (e.g., $600 gross income).8Internal Revenue Service. Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts The trust reports income and deductions, potentially taking deductions for distributions to beneficiaries, who then report that income on their personal returns based on a Schedule K-1 provided by the trust.
