A trust is one of the most flexible tools in estate planning, but it’s also one of the most misunderstood. People often think trusts are just for the wealthy, or assume a will does everything a trust does. Neither is true. This guide breaks down how trusts actually work in Tennessee, the different types available, the legal requirements to create one, and how trust income actually gets taxed.
This guide is part of our bigger guide to estate planning law in Tennessee, so if you want the wider picture of how trusts fit alongside wills and probate, that’s a good place to start.
Thinking about setting up a trust? Call us at 931-245-5060 and we’ll help you figure out if it’s the right move for you.
A trust is a legal arrangement where one person or entity (the trustee) holds and manages property on behalf of someone else (the beneficiary), according to instructions set out by the person who created the trust (the settlor, sometimes called the grantor). Instead of you owning an asset directly, the trust owns it, and the trustee is legally obligated to manage it according to the trust’s terms and in the beneficiaries’ best interests.
At a basic level, a trust works like this: you (the settlor) create a written trust document, name a trustee to manage it, name your beneficiaries, and spell out the rules for how and when they receive the trust’s assets. You then “fund” the trust by actually transferring ownership of property, bank accounts, real estate, investments, and any other assets into the trust’s name. From that point forward, the trustee manages those assets according to the document’s instructions. In lots of trusts, you are even the Trustee while you are alive, so that you still maintain control over your property.
Tennessee has adopted its own version of the Uniform Trust Code, and under Tenn. Code Ann. § 35-15-402, a trust generally needs to meet these requirements to be valid.
They need to be of sound mind and, generally, at least 18 years old.
This has to be clear from the document itself, not just implied.
Or, for charitable trusts, a valid charitable purpose instead. You can be the beneficiary while you are alive.
A trust isn’t valid if it doesn’t actually require the trustee to do anything.
This would collapse the whole point of having separate roles. The exception is a revocable living trust for your benefit while you’re alive.
Because these are legal formalities with real consequences if they’re missing, working with an attorney to draft a trust is a much safer bet than using a generic template.
There are many variations of trusts, but most people run into these four main categories. Beyond these four, there are more specialized versions, charitable trusts, asset protection trusts, and others, but these four cover the vast majority of what people actually need.
Created and funded during your lifetime, and you can change or cancel it at any time while you’re alive and of sound mind. The most common trust used for probate avoidance and incapacity planning.
Once created, this generally can’t be changed or canceled. In exchange for giving up that control, irrevocable trusts often provide stronger asset protection and, in some cases, tax advantages.
Created through your will, this type of trust doesn’t exist until after you die, when your will is probated. Often used to hold assets for minor children or other beneficiaries.
Designed to provide for a beneficiary with a disability without disqualifying them from important public benefits like Medicaid or Supplemental Security Income.
Assets properly held in a trust generally pass to beneficiaries without going through the court-supervised probate process.
Instead of handing a young adult a lump sum inheritance, a trust can stagger distributions over time.
A properly structured special needs trust can provide support without disqualifying that person from public benefits.
A revocable living trust can include instructions for managing your finances if you become unable to manage them yourself.
Unlike a will, which becomes part of the public probate record, a trust generally stays private.
Tennessee allows a self-settled asset protection trust, sometimes called a Tennessee Investment Services Trust.
A trust holding out-of-state real estate can avoid the need for a separate probate proceeding in each state.
This really only applies to larger estates that are actually subject to federal estate tax.
This isn’t really an either/or question for most people, but here’s how to think about it.
A Trust Is Probably Worth Considering If You
Want to avoid probate, want more control over timing and conditions of an inheritance, have a beneficiary who’s a minor or has special needs, own property in more than one state, want to plan for incapacity, value privacy, or want to save time and money for your beneficiaries.
A Will Alone Might Be Enough If
Your estate is relatively simple and modest in size, you’re not concerned about probate, you want a lower-cost estate planning document, or you don’t mind your estate having more expenses associated with probate.
A lot of people end up using both, a trust to handle the bulk of their assets and a “pour-over” will as a backup to catch anything that wasn’t transferred into the trust before death.
Tennessee is actually one of the more trust-friendly states when it comes to duration. Many states limit how long a trust can exist under something called the “rule against perpetuities,” but Tennessee has significantly extended that limit, allowing certain trusts to last for a very long period, commonly cited as up to 360 years, rather than the much shorter limits found in many other states. Because this is a specific statutory rule that can be technical and subject to change, it’s worth confirming the current limit with an attorney if long-term trust duration is part of your planning goals. That said, plenty of trusts are designed to end much sooner than that, on purpose, once a specific beneficiary reaches a certain age, or once a specific purpose has been fulfilled.
Tennessee law does put some limits on who can serve as trustee.
Minors generally can’t serve as trustee, since a trustee has to have legal capacity to enter into contracts and manage property responsibly.
Someone who lacks the mental capacity to manage financial affairs generally can’t serve as trustee.
An entity not legally authorized to act as a fiduciary in Tennessee may be restricted from serving as a corporate trustee.
The same person generally can’t be the sole trustee and the sole beneficiary simultaneously, except in a revocable living trust while you’re alive.
A trustee can also be removed by a court for breaching their fiduciary duties, mismanaging trust assets, or having an ongoing, serious conflict of interest.
Choosing the right trustee, someone both trustworthy and genuinely capable of handling the responsibility, is one of the more important decisions in setting up a trust.
Trust taxation involves a mix of federal rules and a bit of good news specific to Tennessee.
Generally don’t create a separate tax situation while you’re alive. Since you can still control and access the assets, the trust’s income is typically reported on your own personal tax return.
Are often treated as separate taxpayers. They may need to file their own federal income tax return (IRS Form 1041) and pay tax on income the trust retains.
Trusts and individuals generally don’t owe Tennessee state income tax on this type of income, a genuine advantage compared to many other states.
Can still apply to larger estates. Most estates fall well under the federal exemption threshold and owe nothing.
Are generally taxed on distributions they actually receive, particularly income distributed from the trust, while the trust itself pays tax on income it retains.
Here’s roughly what the process looks like, step by step.
Are you trying to avoid probate, control distribution timing, protect a vulnerable beneficiary, or something else? Your goals shape which type of trust actually makes sense.
Based on your goals, decide between a revocable living trust, an irrevocable trust, a testamentary trust, or a more specialized option like a special needs trust.
Pick someone trustworthy and capable, whether that’s yourself, a family member, or a professional trustee.
This should be done with an attorney to make sure it meets Tennessee’s legal requirements and actually accomplishes what you intend.
Tennessee has specific requirements for how a trust needs to be signed to be valid.
This is the step people skip most often, and it’s critical. You have to actually retitle assets into the trust’s name for it to work as intended.
Make sure your will, beneficiary designations, and trust all work together instead of contradicting each other.
Major life events, and changes in the law, should trigger a review of your trust to make sure it still does what you want.
Trusts are just one piece of a complete estate plan.
Trusts only work if they’re drafted correctly and actually funded properly, two places where a lot of DIY plans fall apart. At Dahl Family Law, we bring:
A clear understanding of Tennessee’s Uniform Trust Code requirements.
Experience matching the right type of trust to your actual goals, rather than a one-size-fits-all template.
Attention to the funding step, so your trust actually does what it’s supposed to do.
Coordination between your trust, your will, and your beneficiary designations, so nothing contradicts anything else.
Yes, with a revocable living trust, it's common to name yourself as the initial trustee, keeping full control over your assets during your lifetime, with a successor trustee named to take over if you become incapacitated or pass away.
Generally, no. Unlike a will, which becomes part of the public probate file, a trust document typically stays private, which is one of the reasons people choose them.
A standard revocable living trust generally does not, since you still control the assets. Tennessee's specialized asset protection trust option does offer some protection, but it comes with specific requirements and isn't right for every situation.
Whether you’re trying to avoid probate, protect a loved one, or plan ahead for incapacity, the right trust, set up and funded correctly, can make a real difference for your family.
Dahl Family Law provides representation in a wide range of family law matters, including:
This guide is intended for general informational purposes only and does not constitute legal or tax advice. Trust planning is fact-specific, and outcomes depend on the details of your situation. Please consult with a licensed Tennessee attorney, and a qualified tax professional, regarding your specific circumstances.
