Dear Mr. Premack: My mother created a living trust and transferred
her ranch into the trust. She died recently, and the trust says that the
ranch is supposed to be divided between my sister and me. She actually had
a survey done and gave us each our own relatively identical parcels. I
thought that if I could leave my part in the living trust it might give me
some protection from possible liabilities. I worry because my own children
are teenagers and have their driver’s licenses, and if there is an
accident there could be a court judgment that takes my part of the ranch.
Can I leave the land in the trust? If not, what other options do I have to
protect the ranch from liabilities? – F.H.
Living trusts are very
flexible planning tools, and they can be designed to accomplish a wide
variety of goals. I would have to review the terms of the trust set up by
your mother to be certain what it allows and requires. But from your
letter – where you say that the land is supposed to be divided, and your
mother even surveyed which parts goes to each of you – I would surmise
that the trust was designed to distribute the land outright to you, then
to be terminated.
If that is the case, then you’ll own your share
free from trust. Her trust will have no further impact on the land or your
use and enjoyment of the land. As such, her trust will not be able to
provide any protection of the land from your creditors or from judgments
that may be entered against you.
She could have designed the
trust to require that the land, while separated into shares, continue to
be owned by her trust. Your share would be set aside for your benefit and
your sister’s share would be set aside for her benefit but neither of you
would actually own your shares. The trust could place restrictions on you
– for instance, only the trustee would have a right to sell the land, not
you. And the trust would be irrevocable and non-amendable due to the fact
that its creator (your mother) had died.
If she had placed those
restrictions and had included a “spendthrift provision” in the trust, then
the land would be exempt from any judgment against you. Why? Because you
do not own the land, and the owner (your mother via the trust) did not
allow the assets she set aside for your benefit to be drawn away for the
benefit of your creditors.
A spendthrift provision would have
been easy for your mother’s attorney to create. The trust would need to
recite that it was a “spendthrift trust” as allowed in section 112.035 of
the Texas Property Code. It could further state that the beneficiary’s
interest in the income or the principal of the trust may not be
transferred by the trustee to anyone except to the beneficiary, and then
only under certain circumstances. With the ranch, it could have stated
that it would be held in trust until you die, and then be transferred to
your heirs. If so, the land would be protected from creditor claims and
judgments for your entire lifetime.
If your mother did not place
those restrictions in the trust, but instead instructed that the ranch
should be distributed to you outright after her death, then you do not
have any of those protections from creditors. Instead, you may be able to
rely on another provision in the Property Code: rural homestead
The ranch could be considered to be your rural
homestead if you live there and the county appraisal district has approved
it as your homestead. If your part of the ranch exceeds 200 acres (for a
married couple) you can designate exactly which acres (and the structures
on those acres) are to be treated as your homestead. That designation must
be written, signed by you before a notary, and recorded with the county
clerk. Once on record, those acres are exempt from seizure for the claims
of creditors (with standard exceptions like a mortgage you voluntarily
place against the land or a tax lien).
Now that you own the land,
you should consider placing it into a new trust which you create. The new
trust will not provide you with creditor protection, but if you include
the provisions which your mother omitted, it can provide creditor
protection to your children (and maybe even your grandchildren) when they
eventually inherit the land from you. Talk to an attorney specialist like
a certified elder law attorney to decide if whether a trust is right for
you and what terms would best protect your family and ranch.