A trust is a separation of beneficial ownership from actual ownership. The grantor of the trust, in Texas usually called the settlor or trustor

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1 3 Trusts the Basics What is a trust? A trust is a separation of beneficial ownership from actual ownership. Janet, the trustee, owns the property for the benefit of Jack, the beneficial owner, or just beneficiary. 4 Trusts the Basics Elements A trust requires the following actors: The grantor of the trust, in Texas usually called the settlor or trustor The trustee The beneficiary or beneficiaries The corpus of the trust, meaning some property or assets in the trust 5 Trusts the Basics A trust is characterized by the trustee having a fiduciary relationship with the beneficiary. The primary characteristic of a trustee as a fiduciary is that the fiduciary relationship requires the highest level of fair dealing by the trustee with the beneficiary. The trustee must place the interests of the beneficiary ahead of his own. 6 Trusts the Basics Common uses for trusts Estate planning Tax planning Protect assets Disguising ownership of assets 7 Trusts the Basics There are numerous types of trusts: Dumbell trust Credit shelter trusts Generation skipping trusts Qualified personal residence trusts Irrevocable life insurance trusts Qualified terminable interest property trusts Grantor retained income trust Grantor retained annuity trust 1

2 Grantor retained unitrust Rabbi trust Funeral trust.ad infinitum 8 Trusts the Basics Black s Law Dictionary lists 79 different kinds of trusts. The IRS lists 22 different types of trusts for tax purposes alone. Trust labels are typically named for a tax advantage, court case, or perhaps the person who invented the type. There is potentially an infinite number of trusts, because everyone who invents or reinvents one likes to put a different name on it for marketing or ego purposes. 9 Trusts the Basics For closing purposes, there are only a few basic types of trusts you need to know: Revocable trusts Irrevocable trusts Inter vivos trusts Testamentary trusts Foreign business trusts REITS real estate investment trusts 10 Trusts the Basics For closing purposes, there are only a few basic types of trusts you need to know: Revocable trusts Irrevocable trusts Inter vivos trusts Testamentary trusts Foreign business trusts REITS real estate investment trusts 11 Trusts the Basics The term inter vivos trust means that the settlor of the trust created it while alive. The term testamentary trust means the trust was created as the result of a will or other estate planning device; that is, after the settlor is dead. 12 Trusts the Basics The term revocable trust means that the settlor retained the right to revoke the trust and take the property 2

3 out of the trust. The term irrevocable trust means the trust contains terms that prevent the settlor from taking the property back out of the trust. Be aware that many trusts labeled as revocable trusts may become irrevocable upon the occurrence of an event. A very typical clause is where husband and wife are each settlors of the trust, and the trust becomes irrevocable when one dies. 13 Trusts the Basics In MOST of your closings, you are going to be dealing with a trust whose primary purpose is to avoid probate or control assets in connection with estate planning. It will be typically labeled something similar to, The John and Jane Doe Revocable Inter Vivos Trust, or John Doe Testamentary Trust. 14 Trusts the Basics The Texas Trust Code sets forth five ways to create a trust: A property owner's declaration that the owner holds the property as trustee for another person. A property owner's inter vivos transfer of the property to another person as trustee for the transferor or a third person. A property owner's testamentary transfer to another person as trustee for a third person. An appointment under a power of appointment to another person as trustee for the donee of the power or for a third person. A promise to another person whose rights under the promise are to be held in trust for a third person. 15 Trusts the Basics The Texas Trust Code sets forth five ways to create a trust: A property owner's declaration that the owner holds the property as trustee for another person. A property owner's inter vivos transfer of the property to another person as trustee for the transferor or a third person. A property owner's testamentary transfer to another person as trustee for a third person. An appointment under a power of appointment to another person as trustee for the donee of the power or for a third person. A promise to another person whose rights under the promise are to be held in trust for a third person. 16 Trusts the Basics An express trust will have paperwork creating the trust: A trust agreement A probated will A deed stating the trust terms. 17 Trusts the Basics An express trust will also have a conveyance into the trustee. In an inter vivos trust this will normally be a deed. 3

4 In a testamentary trust, this will normally be a probate court action. Note that a will creating a trust does not act automatically; it must be probated. The grantor can solve this issue by transferring title to a trust while alive. 18 Trusts the Basics Theoretically, a deed is not necessary because a trust can be created by a mere declaration the property is now being held in trust. However, such a declaration would need to be filed of record, like a deed, so a deed is almost universally used instead. Note that a quitclaim deed can be accepted here if its from the grantor to himself as trustee. You are not relying on the quitclaim to vest title, but relying on the prior conveyance to vest title, and treating the quitclaim as a declaration the same owner is now holding the property as trustee of a trust. 19 Authority Issues Trust paperwork answers many important questions Does the trustee have authority to sell real property? Who is the successor trustee if the original trustee is deceased? If there are multiple trustees, can they act individually or only as a group? Can the trustee delegate authority through a power of attorney? Does the trust terminate at some point? Who else may have a vested interest in the property? Who are the beneficiaries? 20 Authority Issues The traditional approach to answering trust authority questions is to READ the paperwork. Trust agreement Will Deed 21 Authority Issues The magic words you are looking for: Trustee has authority to sell and convey property. Trustee has all of the authority provided to trustees in the Texas Trust Code. 22 Authority Issues The Texas Trust Code says that a trustee has certain powers and authority. However, in the event of a conflict between the trust agreement and the Trust Code, the trust agreement controls. For this reason, and because historically the trustee had no authority not granted by the trust instrument, title companies don t like to insure title where the trustee does not have specific authority to convey or receive title in the trust agreement. 23 Authority Issues 4

5 What the Trust Code is useful for is being used by reference in trust agreements. If your trust agreement says, Trustee has all of the powers set forth for trustees in the Texas Trust Code, then the trustee has authority to sell, convey, purchase, and mortgage real property. This phrase is so expansive in power, we now commonly see it not only in trusts, but in wills and powers of attorney, to maximize fiduciary authority. 24 Authority Issues Some people get angry about having to disclose the personal information contained in their trust agreement, even to an underwriting attorney in a confidential manner. To ameliorate this anger, Texas adopted the Certification of Trust form in Certification of Trust Typical exception in your title commitment: This transaction involves a Trust. Company requires the Trustee provide a copy of the Trust Agreement for review or, in the alternative, the Trustee file a Certification of Trust in the real property records meeting all of the provisions of Section (a) and (c) of the Texas Property Code, and provide excerpts from the Trust Agreement sufficient to evidence authority of the Trustee to enter into this transaction. 26 Information Does the trust still exist? Identity of settlor Name & address of trustee Authority to convey property Revocable or irrevocable? Can co-trustees can act independently? 27 Information How trust property should be titled. Statement trust has not been revoked, modified, or amended. Statement as to personal knowledge. 28 Authority Issues Certification of Trust Good news: If title company relies on statements in the certification of trust, there are shelter provisions in the law that protect our insured buyer from liability, and therefore us. 29 Authority Issues Certification of Trust Bad news: People don t fill them out properly. 5

6 They become out of date after they are filed. The statute implies people can do things we will not insure. 30 Authority Issues Certification of Trust Requirements: Must be sworn to and filed of record. If more than two years old, must be replaced with a new one. For any statement as to the trustee s authority, TRGC requires excerpts from the trust be attached. TRGC will only insure if title is in the name of the trustee, NOT in the name of the trust. 31 Authority Issues Certification of Trust The form for a Certification of Trust is in your written materials attached to TRGC Underwriting Memo Paragraphs 5 and 6 of the form require excerpts from the trust documents evidencing: The authority of the trustee to handle real estate transactions. That multiple trustees can act alone. 32 Specific Problems With Trusts 33 Spendthrift Trusts A spendthrift is a person who spends money extravagantly or wastefully. A spendthrift trust is a trust intended to Protect the spendthrift from wasting his or her assets (usually, an inheritance). Protect the corpus of the trust from the spendthrift s creditors. Trustee is given authority to determine how much money or assets the spendthrift/beneficiary receives from the trust. 34 Spendthrift Trusts So long as the spendthrift cannot access the assets of the trust, neither can his creditors, including the Internal Revenue Service. Because a spendthrift trust is designed to protect assets, quite often it will have provisions intended to keep the assets. Trustee may not be able to sell residence. Beneficiary has absolutely no authority at all. 35 Dry Trusts & Passive Trusts By definition, a trust is a division of actual ownership from beneficial ownership. If the beneficial owner retains control of the trust, it becomes a passive trust or dry trust, and title remains vested in the beneficiary. This is true for involuntary liens filed against the beneficiaries. 36 Dry Trusts & Passive Trusts 6

7 If you are relying on a Certification of Trust, this should not be a problem, as there are shelter provisions in the law for BFPs that should protect the policyholder. If you are reading a trust instrument and all authority appears vested in the beneficiaries, perform an involuntary lien search on the beneficiaries and contact underwriting before insuring through this trust. 37 Vesting Issues Do not title property in the NAME of the trust. Do not vest title in John Jones Revocable Trust. Do not vest title in only John Jones, Trustee. Title should be in the name of the trustee, and identify the trust: John Jones, Trustee of the John Jones Revocable Trust. 38 Vesting Issues Example # 1 John conveys title to the John Jones Revocable Trust. He puts spendthrift provisions in the trust to have his son Todd, as trustee, handle the assets for his brother, Bob, who is bad with money. John dies intestate (without a will). The problem is that Texas courts do not recognize a trust as a legal entity, and a deed into a nonexistent entity is void from its exception. In this example, under existing case law, there is a probability Bob could go to court, void the conveyance, and get the court to rule John s property passed ½ to Bob under intestate succession. Read TRGC Underwriting Memo for a legal explanation. You may provide this memo to attorneys. 39 Vesting Issues Example # 2 John has been indicted for criminal fraud, and all of his assets are threatened with seizure. John conveys title into his attorney, vesting it in Bud Budget, Trustee, without disclosing the trust name. John retains full authority over the property per the trust agreement. Bud Budget shows up at your office to sell the property and refuses to provide any information on the trust or beneficiary, claiming you can close without risk under Chapter 101 of the Property Code. Here we have a case of fraudulent transfer through an undisclosed trust. The U.S. Attorney is not likely to treat a purchaser your insured as a BFP without notice if buying from an undisclosed trust and may assert a claim to title. Because John retains authority over the trust property, it is arguably a dry trust, and involuntary liens against John including a judgment may still attach to the property. What if Bud is the trustee of multiple trusts; which one has title? 40 Vesting Issues Solution TRGC will not insure title to an undisclosed trust. Vesting must include both a trustee s name and the name of the trust. Authority must be shown through a review of the trust or a certification of trust. 41 Vesting Issues What do you do if your title is already in the name of the trust or the trustee s name only? Ideally, you get a correction warranty deed titling property in the name of the trustee and naming the trust he or she is acting for. 7

8 Remember that a correction deed changing vesting is a material change and requires joinder of both grantors and grantees. Remember that until the deed is corrected, vesting is arguably in the prior grantor, and they must be searched for involuntary liens. If you are unable to get a correction warranty deed, contact TRGC underwriting. Typically we are going to determine all parties who might have an interest in the property, both if the deed was enforceable and not enforceable, and require all to join. 42 Homestead Rights Homestead rights continue when property is conveyed into a trustee if either of the below apply: The settlor of the trust retains the right to revoke the trust without consent of another person. Settlor retains the right during settlor s life to exercise,.a general power of appointment over the property that qualifies for the homestead exemption. Settlor or beneficiary retain the right to occupy the property as his/her principal residence without rent, for life, for at least ten years, or until the trust is revoked or terminated by instrument or court order filed in the real property records. (See Tx Property Code Sec ) 43 Homestead Rights If property in a trustee s name is being treated as homestead property, TRGC requires joinder of both husband and wife claiming it as homestead, despite provisions in Section of the Property Code that imply it is not required. 44 Home Equity Loans & Reverse Mortgages If property in a trust qualifies as homestead property, TRGC will only insure a home equity loan or reverse mortgage on the property if: The property is the homestead of all of the current beneficiaries and all of the trustees of the trust, and joinder of all of them in the home equity loan documentation (not just the lien, but required notices to spouses). Each beneficiary or trustee who is married also has his or her spouse reside with them on the property, and joinder of that spouse. 45 Other Problems Trustee succession issues If your trustee dies, typically the trust agreement provides for a successor trustee. Occasionally they will neglect to provide for that, in which case they need to get a court to name a successor trustee. Property is titled in a trustee, naming the trust, but no one knows what happened to the trust agreement. Here again, they will need to go to court to get a determination of the trust terms, establish authority of the trustee, or dissolve the trust. 46 Other Problems Trust created, but property never conveyed into the trust: This depends on whether the trustee declared what property is in the trust. Usually the commitment won t mention a trust, and it won t be a problem Testamentary trust created by will, but the will is never probated. Property does not jump into the trust without probate. This is going to cloud title until will probated or rejected for probate. 47 REITs & Foreign Business Trusts Clear your mind of everything I just told you, because the rules for REITs and foreign business trusts are completely different. 8

9 48 REITs & Foreign Business Trusts REIT means Real Estate Investment Trust. A REIT is a creation of the Federal Tax Code, but states have adopted laws allowing their formation to meet the tax requirements. One of the IRS requirements is that the REIT have at least 100 investors, so they are rarely small. 49 REITs & Foreign Business Trusts REITs were not recognized as an entity under Texas law before Before that, no trust could be an entity under Texas law. In 2005, Texas adopted a law allowing REITs to be formed here and to qualify to do business here. 50 REITs & Foreign Business Trusts A REIT is an entity that holds, for investment purposes, real estate or mortgages only, and only a very small amount of other assets. Like a partnership, limited partnership, or limited liability company, profits and losses flow through to the shareholders. This allows investors to get the benefit of real estate ownership without actually owning and managing the real estate themselves, and while having a diversified real estate portfolio. 51 REITs & Foreign Business Trusts While a REIT is theoretically controlled by a trustee or a board of trustees, this can be and often is - changed by their formation documents. Read them. Fortunately, REITs are usually represented by attorneys, who are quite capable of providing documentation as to authority. 52 REITs & Foreign Business Trusts Unlike Texas, in many other states business trusts are a legal entity like a corporation, limited partnership, or limited liability company. In those states, they file trust formation documents with the State. A business trust formed in another state is considered a foreign business trust, foreign meaning foreign to this state in this context. 53 REITs & Foreign Business Trusts We do not have laws in Texas providing for formation of business trusts. However, in 2006, Texas passed a law allowing foreign business trusts to register to do business in Texas with the Texas Secretary of State s Office. You can t form one here, but you can form one in another state, and then register it to do business here. 54 REITs & Foreign Business Trusts Prior to the change in Texas law allowing them to do business here, REITs and foreign business trusts created what was termed an REO Subsidiary to do business in Texas. 9

10 Usually a LP, LLC, or corporation wholly owned by the trust. Because they can do business here, you will increasingly see property title in the name of a REIT or foreign business trust. Particularly common with foreclosure property. 55 REITs & Foreign Business Trusts TWO RULES: 1.You SHOULD title property in the name of the trust only if it is a foreign business trust or a REIT. 2.It is only foreign business trust or a REIT if it has paperwork filed with the Texas Secretary of State s Office allowing it to do business here. 56 SUMMARY Don t be intimidated because someone comes into your office and names some type of trust that you ve never heard of. All trusts that you close for will be express trusts created by a written instrument. Always get a copy of the trust agreement OR a certification of trust. When reading a trust agreement, look for express language that either States the trustee has all of the authority provided by the Texas Trust Code. Has specific authority to sell and convey real property. Do not title property in the name of the trust unless it is a REIT or foreign business trust that has evidence it is filed with the Texas Secretary of State s Office. If your property is already in the name of a trust, you can fix it with a correction deed executed by the last grantor(s) and grantee(s). 57 SUMMARY If you have someone put title in a trust, feel free to call TRGC underwriting. 10