Chapter 9-2 Creation and Validity of Texas Trusts

• Jurisdiction: United States

9-2 Creation and Validity of Texas Trusts

We have already noted that in Texas, in the absence of specific instructions set out in trust instruments, statutory law will govern the relationship between trustees and the trust they administer. The truth is, Texas has an entire body of law—the Texas Trust Code, which is itself embedded in the Texas Property Code—that governs the operation and administration of trusts in the state. The Code applies to (1) all trusts created after January 1, 1984,⁴ and (2) all transactions after January 1, 1984, involving trusts even if the trust was created before January 1, 1984.⁵

9-2:1 Creation of Trusts

Several methods are available to a person who wants to create a trust. Two of the most common are the inter vivos or living trust and the testamentary trust.

9-2:1.1 Inter Vivos or Living Trusts

An inter vivos or living trust is established while the settlor is alive with the intent that it will take effect while the settlor is still alive.⁶ The two basic methods a settlor may use to create an inter vivos trust are distinguished by the identity of the person who holds legal title to the trust property.

In the first method, a declaration (or self-declaration) of trust, the settlor declares him- or herself to be the trustee of certain property for the benefit of one or more beneficiaries, to whom he or she transfers equitable title.⁷ The settlor retains the legal title and is subject to self-imposed fiduciary duties.⁸

Under the second method, a transfer or conveyance in trust, the settlor transfers legal title to another person as trustee and imposes fiduciary duties on that person to manage the property for the benefit of either third parties or the settlor or both.⁹

9-2:1.2 Testamentary Trusts

We first encountered testamentary trusts in Chapter 8, as we discussed their inclusion in wills. We discuss them again at this juncture to understand how they function as trusts.

Essentially, a settlor can establish a trust to take effect upon the settlor's death by including a gift in trust in the settlor's Last Will and Testament.¹⁰ The transfer of title to the trustee and the imposition of trustee duties on him or her does not occur until the settlor dies.

We note that a precondition to the validity of a testamentary trust is that the Last Will and Testament of which it is a part must be valid. If the will fails, any testamentary trust contained in that will is also ineffective. After the Last Will and Testament is admitted to probate, the trust will be examined to determine its validity. The fact that the Last Will and Testament is valid does not grant automatic validity to the trust.

9-2:1.3 Intent to Create a Trust

A trust is established only if the settlor manifests the requisite intent to create a trust.¹¹ A transferor of property has trust intent if he or she (1) divides title to the property into legal and equitable components, and (2) imposes enforceable fiduciary duties on the holder of legal title to deal with the property for the benefit of the equitable holder.¹²

No particular words or conduct is necessary to establish trust intent. By the same token, the mere use of trust terminology alone is insufficient to show trust intent.

9-2:1.4 Consideration Not Required

Because a trust is a type of gratuitous property transfer, rather than a contractual arrangement, consideration is not required for the creation of a trust.¹³

9-2:1.5 Satisfying the Statute of Frauds

Generally, to be enforceable, a trust must be in writing.¹⁴ The writing must contain (1) evidence of the terms of the trust (i.e., the identity of the beneficiaries, the property, and how that property is to be used) and (2) the signature of the settlor or the settlor's authorized agent.¹⁵

The above requirements satisfy the Statute of Frauds. The policy underlying the requirement that trusts be evidenced by a writing is to protect a transferee who actually received an outright conveyance from having those rights infringed upon by someone claiming that the transfer was actually one in trust. Thus, an alleged trustee will use the lack of a writing to raise the Statute of Frauds as a defense to a plaintiff who is trying to deprive the alleged trustee of that person's rights as the donee of an outright gift.

The strict requirements of the Statute of Frauds are almost always enforced where the trust property consists of real property.¹⁶ That having been said, however, a court may enforce an oral trust of real property if the trustee partially performs. If the alleged trustee acts, at least temporarily, as if a trust exists, he or she may be estopped from denying the existence of a trust at a later time and claiming the property as the donee of an outright gift.

As regards trusts of personal property, two instances arise where the rules are sometimes relaxed. First, an oral trust of personal property may be enforceable if the trustee is neither the settlor nor a trust beneficiary and the settlor, either prior to or at the time of establishing the trust, expresses the intention to establish it.¹⁷ Second, a trust consisting of personal property may be enforceable if it is in the form of a written declaration by the settlor who is also the owner of the property being transferred in to trust and he or she now holds the property either as trustee for a third party or for him- or herself and a third party as beneficiaries.¹⁸

9-2:1.6 Trust Property

A trust is a method of holding title to property. Consequently, a trust cannot be created unless it contains property.¹⁹ Any type of property—real, personal, tangible, intangible, legal, and equitable, including property held in any digital or electronic medium²⁰—may be held in trust.²¹

Of course, in order to transfer property into a trust, the settlor must own the property and must have the authority to transfer it. Accordingly, if a person cannot transfer the property—such as where the property belongs to another person, the property has valid restrictions on its transfer, or the proposed trust res is an expectancy to inherit from someone who is still alive—he or she cannot transfer the property into a trust.²² It is important, then, that before the elderly client directs his or her attorney to draft the trust instrument, he or she is certain that he or she (1) owns the proposed trust property and (2) has the authority to transfer it into trust.

The trust creator must also ensure that legal title to the trust property reaches the hands of the trustee. It is not enough for the settlor to sign a trust instrument, own assets that would make good trust property, and intend for that property to be in the trust. The settlor must go one step further and actually transfer or deliver the property to the trustee.²³

As a final matter, we note that if a settlor transfers...