Texas Trust Strategies
By Michael Freeman | Acacia
Trust strategies in Texas span a wide range of objectives, from basic probate avoidance and estate planning to more sophisticated wealth transfer and asset protection arrangements. The right strategy for any particular client depends on the nature and size of the assets involved, the family structure, the specific risks being addressed, and the tax situation. This article covers the strategies most commonly used in Texas and what each one actually accomplishes.
Revocable Living Trust for Probate Avoidance
The revocable living trust remains the most widely used trust structure in Texas, and for most families with meaningful assets, it is a reasonable starting point. Texas has a relatively efficient probate process compared to states like California, but probate still takes time, involves court oversight, creates a public record, and can be complicated when assets are held in multiple states. A properly funded revocable trust avoids probate entirely for assets held in the trust and passes control to the successor trustee immediately upon the settlor’s death or incapacity, without court involvement.
The critical word is “funded.” A revocable trust signed ten years ago but never funded with assets accomplishes nothing. The assets that need to pass outside of probate must be titled in the name of the trust or have the trust named as beneficiary. Real estate, bank accounts, brokerage accounts, and other significant assets should be retitled or assigned to the trust during the settlor’s lifetime. Life insurance and retirement accounts typically designate the trust as a contingent or primary beneficiary rather than being retitled, depending on the planning objectives.
For Texas real estate in particular, transferring property into a revocable trust requires a deed from the individual grantor to the trust, which should be recorded in the county where the property is located. Texas does not require a deed of trust or any additional filing beyond the recorded deed. The transfer does not trigger a due-on-sale clause in a mortgage for a revocable trust, nor does it affect the homestead exemption or the general residential property tax exemption for a primary residence.
Irrevocable Life Insurance Trusts
For individuals whose estates approach or exceed the federal estate tax exemption, an irrevocable life insurance trust is a well-established strategy for keeping life insurance proceeds out of the taxable estate while still directing those proceeds to benefit family members. The trust owns the policy and is the named beneficiary; when the insured dies, the proceeds are paid to the trust rather than to the estate, keeping them outside of estate tax calculations.
The mechanics require attention. If the insured transfers an existing policy into the trust, the three-year lookback rule under IRC Section 2035 means that if the insured dies within three years of the transfer, the proceeds are included in the taxable estate. For this reason, it is generally more effective to have the trust purchase a new policy rather than transfer an existing one. The insured makes annual gifts to the trust, which the trustee then uses to pay the premiums; the gifts must be structured to qualify for the annual gift tax exclusion, which requires Crummey notices to the beneficiaries.
This structure requires precise ongoing administration. Crummey notices must be sent to beneficiaries annually, premium payments must flow through the trust rather than be paid directly by the insured, and the insured must not retain any incidents of ownership over the policy. Errors in administration can jeopardize the estate tax exclusion the trust is designed to achieve.
Spousal Lifetime Access Trusts
A spousal lifetime access trust (SLAT) is an irrevocable trust funded by one spouse for the benefit of the other spouse, typically with children as remainder beneficiaries. The funding spouse makes a taxable gift to the trust, which uses available gift tax exemption, removing the gifted assets from the funding spouse’s taxable estate. The beneficiary spouse can receive distributions from the trust during their lifetime, which provides the funding spouse with indirect access to the trust assets through the marital relationship.
The risk in a SLAT is the reciprocal trust doctrine and the practical reality that indirect access depends on the marriage remaining intact. If the beneficiary spouse dies, the funding spouse loses the indirect access that made the SLAT palatable. If the couple divorces, the same result follows. For this reason, SLATs work best in stable marriages where the funding spouse has sufficient assets outside of the trust to support themselves independently of trust distributions.
Two SLATs, one funded by each spouse for the benefit of the other, can theoretically allow both spouses to use their gift tax exemptions while each retaining indirect access through the other’s trust. However, the reciprocal trust doctrine provides that trusts structured in a way that effectively cancels out by putting each spouse in the same position they would have been in without the trusts can be disregarded for tax purposes. Structuring two SLATs requires meaningful differences in terms, timing, and amounts to avoid the reciprocal trust problem.
Dynasty Trusts and Generation-Skipping Planning
Texas allows trusts to continue for an extended period under the rule against perpetuities, and with proper drafting, a Texas trust can be structured to last for multiple generations, effectively creating a dynasty trust. Assets held in a properly structured dynasty trust can pass from generation to generation without incurring estate tax at each generational transfer, provided the generation-skipping transfer tax exemption is allocated at the time of funding.
The generation-skipping transfer tax (GST tax) applies to transfers that skip a generation (from grandparent to grandchild, for example) and is currently assessed at the same rate as the estate tax. Each individual has a GST tax exemption (the same amount as the estate tax exemption, currently over $13 million per person as of 2024, though scheduled to decrease significantly after 2025 absent legislative action). Allocating GST exemption to a dynasty trust at funding exempts all future appreciation and accumulation in the trust from GST tax, which is a meaningful benefit for growing assets held over multiple generations.
Using Trusts with LLCs and Other Entities
One of the more effective structural combinations in Texas planning is a trust holding membership interests in an LLC. The LLC provides liability protection and operational control for active assets (real estate, business operations, investment portfolios); the trust provides the estate planning and succession framework for the ownership interests. Together, the two layers can provide both operational flexibility and long-term transfer planning efficiency.
For real estate in particular, the combination of a Texas LLC holding the property and a trust holding the LLC interests is a common and well-understood structure. The LLC provides a liability barrier between the property and the owner; the trust addresses what happens to the LLC interest when the owner dies or becomes incapacitated. Properly structured, real estate can pass from generation to generation within the LLC and trust framework without triggering probate or exposing the owner’s personal assets to property-related liability.
Acacia advises clients on trust strategies tailored to their specific planning objectives, including combinations of trusts and LLCs for real estate and business holdings. For additional perspective on Texas trust and asset protection strategies, MichaelIoane.com provides ongoing commentary from a consulting standpoint.
The information in this article reflects general structural principles and practical observations from consulting experience and is provided for educational purposes only. It should not be interpreted as individualized legal or tax advice.