last update 1-01-2003
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
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
The legitime or forced portion may be held in trust
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
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.
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
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
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
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
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
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
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
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
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
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
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-
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
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
It will not entirely eliminate delays
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
The IRS perceived that certain individuals have
abused these trusts by using the rules to claim large
deductions for charitable contributions without really
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
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
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
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
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
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
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 =======================
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.
If you live in Louisiana and want to talk about your situation, please
call me at:
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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