USA – TEXAS Law and Practice Contributed by: Perrin Clark and Meredith McIver, Ytterberg Deery Knull LLP
3. Trusts, Foundations and Similar Entities 3.1 Types of Trusts, Foundations or Similar Entities Revocable Trusts Revocable trusts are commonly used to consolidate and hold assets during life. This provides continu - ity of management, particularly upon the incapacity or death of the grantor. Upon the death of the gran - tor, revocable trusts help avoid the need for ancillary probate with respect to real property located outside the jurisdiction of original probate. Finally, revocable trusts help keep the decedent’s estate plan confiden - tial, because only the decedent’s will, not the trust instrument governing the revocable trust, is filed as part of the probate proceeding. Irrevocable Trusts Irrevocable trusts are commonly used with a variety of estate planning techniques as discussed in 2.6 Trans- fer of Assets: Vehicle and Planning Mechanisms . Grantor Trusts Grantor trusts are often created so that the trusts are ignored for income tax purposes and the grantor remains responsible for reporting the trust’s tax attrib - utes on their individual tax return. Therefore, transac - tions between the grantor trust and the grantor avoid income tax implications. Non-Grantor Trusts Non-grantor trusts are also commonly created, so that transactions between the grantor and the trust are recognised for income tax purposes and the trust must report its tax attributes on its separate tax return; provided that certain tax attributes, such as taxable income and any associated tax liability, may be carried out to a beneficiary with distributions from the trust. Charitable Funds and Foundations Foundations are often created to facilitate clients’ charitable endeavours. However, in recent years, cli - ents have increasingly opened accounts with donor advised funds, rather than create new foundations. Donor advised funds are treated as public charities for the purposes of determining deductibility rules appli - cable to clients’ donations, and clients’ accounts with
donor advised funds are not subject to the annual 5% distribution requirement that applies to foundations. 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 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions 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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