last update 1-01-2003

Louisiana Trusts

When situations arise that a person can no longer take care of his property or when a minor is involved who cannot take care of his property or when other planning situations arise, trusts can sometimes be of benefit. Many people think that the very term trust means that taxes can be avoided and that a great panacea has arrived. In reality, trusts are good in the right situations but do not, normally in and of themselves, do very much toward tax savings.

Source La Trust Code at LRS 9:1721, et seq

Trusts in General

The term trust simply refers to a relationship that results from the transfer of title to property to a person to be administered by that person as a fiduciary for the benefit of the one making the transfer. If I transfer a rent house to my brother for him to manage for me, that is, in a simple form, an example of a trust. However, in estate planning, the factual situations can be more complicated consisting of more assets with specific instructions as to when and how to distribute income and principal.

A trust can be formed during life in which it is called an inter vivos trust or it can be part of a will and created as of the time of death in which it is called a testamentary trust. All trusts that are not testamentary trusts are inter vivos trusts regardless of the time of creation.

The person who creates or sets up the trust and transfers property to it is called the settlor. A person who transfers property to a trust later is not called a settlor. A settlor may dispose of property in trust to the same extent that he may dispose of that property free of trust and to any other extent authorized by law. A trust or a disposition in a trust may be made subject to any condition that is not forbidden by law. It may be gratuitous or by gift to some beneficiaries and onerous or in exchange for a payment as to other beneficiaries.

A testamentary trust may only be created according to one of the forms authorized for creating a will. Only the testator of a will can be a settlor for a testamentary trust. A testamentary trust is created at the moment of the settlor's death, without awaiting the trustee's acceptance of the trust.

An inter vivos trust may only be created by authentic act or by act under private signature executed in the presence of two witnesses and duly acknowledged by the settlor or by the affidavit of one of the attesting witnesses. There may be one or more settlors of an inter vivos trust. An inter vivos trust is created upon execution of the trust instrument, without regard to the trustee's acceptance.

No particular language is required to create a trust but it must clearly appear that the creation of a trust is intended. A trust instrument should be interpreted in a manner that will sustain the effectiveness of its provisions if the instrument is susceptible of such an interpretation.

The named trustee must affirmatively accept the appointment of trustee and he may do so in the trust instrument or in a separate instrument. His acceptance is retroactive to the date of creation of the trust.

A trustee is a person to whom title to the trust property is transferred to be administered by him as a fiduciary. There may be one or more trustees to a trust. The only parties who can be trustees are natural persons who have the full capacity to contract or a bank or trust company organized under the laws of Louisiana or the United States and domiciled in this state.

The trustee and several successor trustees can be named by the settlor in the original trust document. Although the trustee is required to accept his appointment, the failure of a trustee to accept the appointment will not affect the validity of the trust. If no further trustees are named after the list of successor trustees has been exhausted, then a court may appoint a trustee.

A trustee may resign his appointment by giving written notice to the beneficiaries or by such other means as may be outlined in the trust document. A trustee can also be removed according to the terms of the trust or by a court based on sufficient evidence. Once a trustee has resigned or been removed, he has no further authority over the trust property. His resignation or removal has no effect over any potential liability for acts committed during his administration.

A settlor may be the beneficiary of a trust that he creates. There may be separate beneficiaries as to the income and principal of the trust or the same person may be a beneficiary of both income and principal. There may be several concurrent beneficiaries of income or principal or both. A beneficiary need not specifically accept the benefit conferred on him; his acceptance is presumed.

In Louisiana, a trust will terminate after a period of time depending on the settlor or beneficiaries but for individuals, it will terminate when the last surviving income beneficiary dies or 20 years after the settlor dies, whichever is last. If neither the settlor nor the beneficiaries are natural persons, then the trust will terminate 50 years after its creation.

The legitime or forced portion may be held in trust provided that:

The net income accruing to the forced heir is payable to him at least once per year;

The forced heir's interest is subject to no charges or conditions except as spelled out in the law. However, this part allows for the usufruct in favor of the surviving spouse.

Except as to the legitime burdened with a usufruct, the term of the trust does not exceed the life of the forced heir; and

The principal held in trust shall be delivered to the forced heir or his heirs or legatees free of trust upon the termination of the portion to the trust that affects the legitime.

A settlor or any other person may make additions of property to an existing trust by donation inter vivos or by will with the approval of the trustee. The right to make additions may be restricted or even denied by the trust instrument. The form required for making a donation to a trust is the use of the same form that would be required to make a donation free of trust. The trustee must accept the donation in writing.

A trust, by provisions in its instrument, may be modified, terminated, rescinded, or revoked without the consent of a person who has added property to the trust, even thought the property that has been added is affected.

Beneficiaries

A beneficiary is a person for whose benefit the trust is created and may be a natural person, a corporation, a partnership or other legal entity having the capacity to receive property.

A beneficiary must be designated in the trust instrument. The designation is sufficient if the identity of the beneficiary is objectively ascertainable solely from standards stated in the trust instrument. A beneficiary must be in being and ascertainable on the date of the creation of the trust. An unborn child is deemed a person in being and ascertainable if he is later born alive.

The term beneficiary refers to the ones who will benefit in some manner from the existence of the trust. The beneficiary is normally termed an income beneficiary or a principal beneficiary.

An interest in the income of a trust may be given absolutely or conditionally. It may be given for the life of a beneficiary or for a term, certain or uncertain, but not to exceed the life of the beneficiary.

A settlor may limit the interest of a beneficiary of income to a portion of income determinable under an objective standard established in the trust instrument. A trustee may be directed to distribute the balance of such income to other beneficiaries of income, to accumulate it, or may be directed to allocate the balance of such income to principal.

In the absence of instructions to the contrary contained in the trust document, trust income is to be distributed to the designated beneficiary at least every six months. The settlor, by instructions in the trust, may stipulate when the income allocable to a designated beneficiary shall be distributed to him, or he may stipulate that the trustee has discretion to determine the time or frequency of distribution or to accumulate some or all of the income.

An interest in income terminates at the death of the designated income beneficiary, or at the expiration of the period of his enjoyment if the interest is not for life. At the time of termination of an income interest, accumulated or undistributed income shall be paid to the beneficiary or his heirs, legatees, or legal representative.

Unless the trust instrument instructs otherwise, if there is only one income beneficiary and he dies, then his income interest is transferred to the principal beneficiaries in an amount proportionate to the principal interest. Termination of an interest in income of one of several income beneficiaries causes the other income beneficiaries or their successor to become beneficiaries of that interest in income in proportion to their interest in the balance of the trust.

The principal beneficiary is the one that shares in the principal or corpus of the trust. That interest is acquired immediately upon the creation of a trust. Upon the death of a principal beneficiary, his interest vests in his heirs or legatees subject, however, to the trust instrument which may provide otherwise. For instance, a trust may provide that the interest of a principal beneficiary who dies without a will and without leaving descendants may vest in some other person, who shall be a substitute beneficiary.

The interest of a substitute beneficiary may be conditioned upon his surviving the principal beneficiary and may provide for multiple substitute beneficiaries if one does not survive the principal beneficiary. The substitute beneficiary must be in being or be ascertainable at the date of the creation of the trust.

Any beneficiary, whether income or principal, may refuse an interest at any time after creation of the trust, provided that he does so before accepting any benefit under the trust. A person who is incapable cannot refuse an interest in trust, but his legal representative can refuse it.

A creditor cannot accept an interest in a trust that is a gratuitous, inter vivos trust if the beneficiary refuses it. However, when a beneficiary refuses his interest in a testamentary trust to the prejudice of his creditor's rights, the creditor may accept in his stead to the extent that the creditor's rights have been prejudiced.

As a general rule, a beneficiary may transfer or encumber the whole or any part of his interest in a trust unless the trust instrument provides otherwise. The trust may provide that the beneficiary cannot voluntarily or involuntarily alienate his interest. This provision to prevent the alienation of a trust interest is normally referred to as a spendthrift provision.

A creditor can only seize (1) an interest in income or principal that is subject to voluntary alienation of a beneficiary; and (2) a beneficiary's interest in income and principal, to the extent that the beneficiary is a settlor of the trust.

Notwithstanding the above rules, a beneficiary's interest may be involuntarily seized, after due proceedings in the proper court, for (1) alimony or maintenance of a person whom the beneficiary is obligated to support; (2) necessary services rendered or necessary supplies furnished to the beneficiary or to a person whom the beneficiary is obligated to support; or (3) an offense or quasi-offense committed by the beneficiary or by a person for whose acts the beneficiary is individually responsible. Property that is subject to exemptions from seizure retain those exemptions while in trust to the same extent as if the property were held free of trust.

Trust instruments may be modified or revoked except to the extent that they provide otherwise. The reservation of the right to revoke includes the right to modify the trust. If the settlor reserves an unrestricted right to modify the trust, he may change or amend the terms of the trust in any particular, or even revoke or terminate the trust. If several settlors were involved in the creation of the trust, then all surviving settlors must concur in any modifications.

Source LRS 9:1801 et seq

Trustees

The trust document normally includes a statement of all of the duties and powers of the trustee. To the extent that those duties and powers are not addressed, they are to be supplied by the Louisiana Trust Code.

The duty of loyalty of a trustee to the beneficiaries is an important element of trust administration. A provision of the trust instrument that purports to limit a trustee's duty of loyalty to a beneficiary is ineffective. However, an individual beneficiary, who is acting upon full information, may relieve the trustee from duties and restrictions concerning the prior administration of the trust but no such instrument is effective to the extent that it purports to limit any of the future duty of loyalty to the beneficiary.

A trustee is to administer the trust solely in the best interest of the beneficiary. A violation by a trustee of the duty he owes to a beneficiary as trustee is a breach of trust and may be a basis for a cause of action. A trustee in dealing with a beneficiary on the trustee's own account shall deal fairly with him and communicate to him all material facts in connection with the transaction that the trustee knows or should know. He must always keep his own property separate from the property of the trust.

A corporate trustee shall not lend trust funds to itself or an affiliate, or to a director, an officer or an employee of itself or of an affiliate, unless the trust instrument provides otherwise. An individual trustee shall not lend funds to himself, or to his relative, employer, employee, partner or other business associate, unless the trust instrument provides otherwise. Similar rules prohibit or limit sales between the trust and the trustee.

Trustees are under a duty to the beneficiary to keep and render clear and accurate accounts of the administration of the trust. He is to render to a beneficiary or his legal representative at least once a year a clear and accurate account covering his administration for the preceding year. He is not required to file the accountings with a court unless expressly required to do so by the trust instrument or by a proper court.

Although the requirement is to file an annual accounting, the trustee is also obligated to give to the beneficiary upon his request and at reasonable times complete and accurate information as to the nature and amount of the trust property and permit him or a person duly authorized by him to inspect the subject matter of the trust and the accounts.

The trustee is obligated to be a prudent man in his administration of the trust property. This rule requires that in the administration of a trust, he exercise such skill and care as a man of ordinary prudence would exercise in dealing with his own property. As such, the trustee is under a duty to a beneficiary to take reasonable steps to take, keep control of, and preserve the trust property.

The trustee's powers are normally set out in the trust document. Unless those powers are limited by the settlor, the trustee has numerous powers. If discretion is conferred upon a trustee with respect to the exercise of a power, its exercise will not be subject to control by the court, except to prevent an abuse of discretion by a trustee.

A trustee may delegate to an agent or mandatary the power to perform ministerial acts and acts that he could not reasonably be required to perform personally. Unless restrained, the trustee can lease property, sell property, mortgage property, compromise or abandon claims, exercise all the powers of a stockholder and other acts to achieve the purpose of the trust.

If a trustee enters into a contract that is within his powers as trustee and if a cause of action arise thereon, the party in whose favor the cause of action has accrued may sue the trustee in his representative capacity. A judgment rendered in the action in favor of the plaintiff will be satisfied out of the trust property. The trustee will only be held personally liable for acts outside his authority, for breach of fiduciary duty or for a contract if the contract does not exclude personal liability. The use of the words "trustee" together with language identifying the trust is deemed to be prima facie evidence of an intent to exclude a trustee from personal liability.

Source LRS 9:1781 et seq

Who Should be a Trustee

As previously stated, an individual above the age of 18 can be a trustee. Thus, a settlor could appoint anyone to that position. However, a trustee is normally in an important position and the settlor should not appoint a person without due consideration.

Many people want to appoint a family member as the trustee. This person is familiar with the settlor's family, is known by most or all of the heirs or beneficiaries, probably won't charge a fee and they may even have a personal interest in the outcome of the trust. Thus, there are some positive reasons to consider such a family member.

On the other hand, a family member may not know much about administration of trusts and investments. They may have to hire attorneys, CPAs, investment advisors, or other professionals to help them. There could also be conflicts within a family that would result if a family member is the trustee. Since trusts may last for a number of years, there is the problem of a human trustee dying before the trust terminated. That problem could be overcome by appointing successor trustees or appointing a bank.

Most large banks have trust departments that can do a good job of managing the assets of a trust. They are professionals and have experience in that area, are not plagued with the problems of death, and do not have the problems associated with the interactions of family members.

On the downside, banks are in the business to make a profit. Thus, there will be fees for their services. Banks are normally known for being conservative and not taking any chances. A settlor make be willing to take some risks in investments and may not want to be limited by a bank's policies. Although banks do not die, they do have personnel turnover so the beneficiaries may not always be dealing with the same people at the bank.

It is probably not a good idea to use your attorney as the trustee. Although he could handle the administrative aspects of the job, he would probably charge an hourly fee for his work which could be expensive in relation to other alternatives. It may be best to use the attorney for the legal aspects of the trust and let someone else be the trustee. As an alternative, if the settlor was going to appoint himself as a trustee, it may be advisable to appoint the attorney as a co- trustee.

Caveat: The settlor should almost never be the trustee of an irrevocable trust. Not only will he often lose the tax benefits, he is inviting a review by the IRS.

There are a number of variations in the usage of trusts and they are often named for that usage. The details may not be any different from the rules previously discussed but it may be good to consider some of the variations to understand how they are being put to use.

Revocable or Living Trusts

Trusts normally fall into two general categories: revocable and irrevocable. A revocable trust is one in which the grantor transfers property to a trustee but that the grantor continues to control or, at least, has the right to cancel and take back the property. It is like transferring the property but keeping his fingers crossed and later taking back the property.

A Living Trust is really just a revocable trust that is set up and used to hold property of the parties. Normally, a living trust is set up by a couple who want to have someone manage property for them, provide income for them and to take care of them in later years. Upon their demise, the value of the trust would be included in their final estate but the detailed properties included in the trust would not be listed.

There has been discussion by sales persons trying to convince elderly people that a living trust will save them taxes, will save them probate costs, will keep the details of their finances away from public scrutiny and will provide financial security for them. These items may be true in some cases but in the majority of situations, few of these points will apply.

First, since the trust is revocable, all of the value of the trust will be included in the final estate and will be subject to taxation. The supposed advantage is that when the first passes on, the assets are not taxed but are held in abeyance until the second passes on. This is nothing magic and this can be achieved much easier with a will and without the creation of a trust.

Second, there is discussion that a living trust will save probate costs. I have heard that probate costs in some other states, such as California, are high and the use of a living trust for residents of those states may be beneficial. Probate costs in Louisiana are not high and normally consists of the fees necessary to gather the property together and process the papers for the succession. If a trust were created, those same costs would be diverted to the same tasks as it relates to the trust creation so there are no net fees saved to speak of.

Third, there is discussion that the contents of a person's estate will be kept confidential because the value of the total trust may be included in the estate but the details will not show up. However, that fact alone discloses the total value of the estate. Further, if the trust involves immovable property, that property would have to be transferred to the trust and that transfer would be recorded in the public record. Thus, confidentiality would be limited to the liquid investments of cash, CD's, stocks and bonds that are held in the trust. If that is sufficient reason to create a living trust, then it may be a good idea.

Fourth, the financial security that a couple has is generated by the assets and investments that they have. If they transfer those investments to a trust, then a trustee will make the investments for them, provide them with the income from the investments and charge them a fee for doing so. If the people are not going to be able to care for themselves or to manage their investments, then a living trust for that reason may be a good consideration. However, the management and investment of assets can also be done by other means.

There are several things that a living trust will NOT do:

It will not avoid taxation

It will not make a will unnecessary

It will not affect non-probate assets, such as life insurance, annuities, IRAs. These proceeds will go to the beneficiary named in the instrument

It will not protect your assets from creditors

It will not protect assets, absolutely, from a disgruntled heir/legatee.

It will not entirely eliminate delays

Irrevocable Trusts

The other category of trust is the irrevocable trust. Trusts can be created whereby the settlor transfers property to it and abandons any possibility of getting the funds back. This is referred to as an irrevocable trust. The settlor irrevocably cuts his ownership ties to the property and to ever getting it back. In order to achieve tax benefits, a trust will almost always have to be of the irrevocable nature.

Charitable Remainder Trusts

A Charitable Remainder Trust allows individuals to receive income for life (or for a fixed number of years) and then a charity receives the trust funds when the trust term ends. They can be set up in two ways, as an Annuity Trust in which the income payments are the total income of the trust each year and as a Unitrust in which income payments are a percentage of the value each year of the assets in the trust.

The IRS perceived that certain individuals have abused these trusts by using the rules to claim large deductions for charitable contributions without really benefitting charity.

The new law cracks down on this abuse by putting new limits in place...

The value of the annuity or unitrust interest must not be more than 50% for trusts set up after June 1997, and

The value of the interest passing to charity must be at least 10% of the initial value of the property placed in trust for most transfers after July, 1997.

Personal Residence Trust

A personal residence trust (PRT) is created when a person transfers his residence into a trust and retains the right to use the residence for a specific number of years. At the end of that time, the residence is transferred to the transferor's heirs.

When this type of trust is set up, a taxable gift is made. The amount of the gift depends on the value of the residence, the term of the trust and the applicable federal rate in effect.

An example would be that William creates such a trust of his home with a term of 10 years, after which the property reverts to his son, John. Applying the IRS tables to the $500,000 property value, the taxable gift may be only $200,000.

The advantage is that the value of the property is frozen in the estate of the grantor and will not rise. Any growth in the value of the property after the transfer will inure to the benefit of the children. The amount subject to gift taxes is minimized because the property won't be received by the children for several years.

The disadvantage is that after the trust's term is complete, ownership of the property is transferred to the children and the grantor would have to rent it from them to continue occupancy. Moreover, the fair market value of the property is included in the grantor's estate if he dies during the term of the trust. The trust is irrevocable which is a significant disadvantage. You must outlive the trust to realize the tax benefits. Finally, the children's basis in the property would be lower than if they had received the residence from the parent's estate.

A better alternative than a PRT may be to make a series of gifts of real estate to the next generation. Each year, you can give each of your descendants a fraction of your house or other real estate, gradually removing the property from your taxable estate.

Under this alternative, you can use the annual exclusion of help make the "fractional" transfers. Valuation discounts reductions in the value for gift tax purposes can be claimed on such transfers. Although each situation is unique, acceptable discounts average 30-50%.

Example: Your residence is valued at $300,000. You and your spouse give each of your two children a one- tenth interest. Nominally, each gift is worth $30,000 (1/10 of total).

However, you get an independent appraisal and it supports a discount, based on what a third party would pay for one-tenth of your home. Now each gift is valued at only $20,000, not the original $30,000, so the transfer is fully covered by your joint annual gift tax exclusion.

These transactions are implemented with simple real estate transfers. Filing costs are likely to be minimal but you will need periodic appraisals to support the values for the gifts and you will need to properly document the gifts annually.

Insurance Trusts

An insurance trust is simply a trust arrangement for a trustee to hold an insurance policy for the decedent. The trust can be revocable or irrevocable and the trust can be the beneficiary of the insurance proceeds or someone else can be.

If a trust is revocable, then the grantor has ties to it and control it. Anytime that the grantor can control the trust or an insurance policy held by the trust, the odds are good that the entire value of the trust and likely the entire value of the insurance proceeds may be included in his estate for tax purposes.

Assuming the trust is irrevocable, the insurance proceeds are paid to the trust, as mentioned above, then they would be received by the trustee free of any income, estate or inheritance taxes. Distributions to the family thereafter from the trust would only be taxable to the extent of earnings from investments of the proceeds.

If you transfer an existing life insurance policy to the trust, then you must survive a minimum of three more years to prevent the proceeds from being pulled back into your estate. A means around that is to take out a new policy. Since you would then be dealing with a new policy, there would not be a transfer or gift that would be brought back into the estate. However, if you have been diagnosed with a terminal disease, you may not qualify for a new policy. Problems such as these are why people should make estate planning a lifetime plan and avoid the last minute problems.


========================  WARNING  =======================
                      AND DISCLAIMER
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed.  Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a 
attorney to discuss the specific facts of your case
and the law of your state.
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last update 1-01-2003

Louisiana Trusts

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