USA – TEXAS Law and Practice Contributed by: Perrin Clark, Ytterberg Deery Knull LLP
3.4 Exercising Control Over Irrevocable Planning Vehicles Irrevocable trusts generally cannot be changed or revoked. Decanting In recent years, Texas has adopted a decanting stat - ute that allows some changes to be made by decant - ing the assets of the old trust into a new trust with modified trust provisions. The extent to which modi - fications are allowed is determined by the trustee’s discretion to make distributions from the old trust. A trustee with full discretion has much greater authority to decant to a new trust with modified trust provisions. A trustee with limited discretion generally cannot decant to a new trust unless the beneficial interests remain unchanged. Reformations and Modifications Texas allows judicial reformations and modifications of trusts in various circumstances. Reformations change the terms of the trust effective as of the creation of the trust. Modifications change the terms of the trust effective as of the date of the court order. A com - mon justification for reformations is scrivener’s error. There are more bases for modification, but modifica - tion does not have retroactive effect. Trust planning, involving the creation of irrevocable trusts with spendthrift provisions, can provide asset protection benefits. A beneficiary’s creditors generally cannot reach assets owned by the trustee and held in trust. Trust assets become subject to creditor claims if they are distributed to the beneficiary; therefore keep - ing assets in such trusts can provide important asset protection benefits. However, Texas law does not provide for the creation of self-settled asset protec - tion trusts; therefore the asset protection benefits of trusts generally only apply to trust beneficiaries in the context of irrevocable trusts created by third parties. Other important asset protection strategies in Texas include: 4. Family Business Planning 4.1 Asset Protection
Finally, opening an account with a donor advised fund, rather than creating a foundation, also avoids the administrative work associated with maintaining a foundation. From time to time clients also create other charitable organisations for their planning purposes, including, without limitation, private operating foundations and public charities. Private Trust Companies (PTCs) In the recent years, private trust companies (PTCs) have become a more common component of the estate plans of very wealthy individuals and families. PTCs allow clients with multiple trusts to consolidate management and control of those trusts in a privately owned and controlled entity. PTCs can also allow cli - ents to consolidate governance, administrative, and family office activities for themselves and their fami - lies. Texas was at the forefront of this trend and allows the creation of PTCs. Texas PTCs are regulated by the Texas Department of Banking. 3.2 Recognition of Trusts All trusts discussed herein are recognised in Texas. 3.3 Tax Considerations: Fiduciary or Beneficiary Designation If a foreign trust has a US citizen or resident as benefi - ciary or serving as fiduciary, various US federal report - ing requirements may be triggered, including, without limitation, the following: • Form 3520 reporting transactions with a foreign trust or receipt of certain foreign gifts; • FinCEN Form 114 reporting foreign bank and finan - cial accounts; and • Form 8938 reporting certain foreign financial assets. If a beneficiary or donor of a trust serves as a fiduciary, this potentially creates an estate tax inclusion risk and special provisions will be needed in the trust instru - ment to ensure that the tax objectives of the planning are not jeopardised.
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