Trust Is a Valuable Tool

¶ … trust is a valuable tool in the process of organizing an estate plan. A trust is a legally created entity that is created for the expressed purpose of holding assets that are managed in accordance with the terms dictated by the trust document. The individual creating the trust, the grantor, describes how he wants the trust assets to be managed and distributed. In creating the trust an individual or institution is designated as the trustee. The trustee is empowered to manage the trust in accordance with the written terms of that trust. Trusts are ordinarily created for the benefit of designated beneficiaries. There are several general forms of trusts. One form is a revocable trust. Revocable trusts allow the grantor to change his mind and withdraw assets from the trust. Irrevocable trusts, on the other hand, require that the grantor surrender permanent control over the assets unless the terms of the trust dictate otherwise. The creation of a trust can be a simple matter but the creation of some trusts are extremely complicated and require the expertise of an individual thoroughly trained in the law of trusts as the tax implications can be highly confusing.

Chapter 2: Elements of Trust

There are essential elements that must be satisfied in order for a valid trust to be created. First, there must be a trustee. This individual holds legal title to the trust property but holds it on behalf of the beneficiaries who hold equitable title. The second element is that there must be property in the trust. This property must be capable of being owned. Typically, such property is in the form of land or stocks. Items such as pension funds cannot form the corpus of a trust. Every trust must have a beneficiary. Such beneficiary must be either an individual or a charity. The beneficiary must be capable of benefiting from the trust. A trust that does not have a designated beneficiary is unenforceable. The final element is that the trustee must handle the trust property for the benefit of the beneficiaries and in accordance with the terms of the trust.

Chapter 3: Creation of Express Trusts

In creating an express trust there must exist a stated intent to create a trust. There is no specific language required in expressing this intent but it must be clearly understood. In most cases, allowing the beneficiary to know that the trust exists aids in establishing intent. At the time that the trust is created the individual creating the trust must have the legal capacity to create the trust. This means that he or she must able to understand the effect of the trust. Additionally, the designated trustee, whether an individual or institution, must also have the capacity to serve in such position. As the third element of trust creation, the terms of the trust in most circumstances must be in writing in order to comply with the Statute of Frauds. Trusts may be created for nearly any purpose as long as said purpose is neither illegal or against public policy. Trusts that are created, for example, to avoid the payment of creditors would be against public policy and, therefore, invalid and unenforceable. There must be at least one beneficiary designated to receive the benefits of the trust. If a beneficiary, either an individual or charity, is not designated the trust is deemed to be unenforceable and the trustee is free to carry out the terms of the trust but there is no one who can force such enforcement. Once the trust is created and property is transferred to the management of the trustee the trust holds legal title to the trust property and the beneficiary holds equitable title. In drafting trust agreements careful attention must be afforded the Rule against Perpetuities and Restraints on Alienation. These two ancient concepts are applied differently depending on the jurisdiction but their application might frustrate the intent of the grantor in creating the trust and special attention must be afforded both concepts.

Chapter 4: Transfer of Beneficiary's Interest

Under normal circumstances the beneficiary to a legal trust owns an equitable interest in the property that forms the corpus of the trust, that is, he or she is entitled to the benefits that the property generates in accordance with the terms of the trust. This equitable interest can be sold, transferred or assigned just like any property interest. The terms of the trust, however, may limit the ability of a beneficiary to dispose of his or her interest. For example, the trust may stipulate that any attempt by a beneficiary to sell, transfer, or otherwise dispose of the interest may result in the equitable interest reverting to someone else. There is even a special provision in many trusts that are identified as spendthrift clauses that expand on the beneficiaries' use of trust proceeds. Such provisions are commonly used in situations where the beneficiary has a history of poor money management.

Chapter 5: Charitable Trusts

Often times the beneficiary of the trust is a charity of some form. Like all trusts the charity designated as the beneficiary can be of any form so long as it is legal recognized as such. Charitable trusts can take on several forms. A grantor can designate the charity as a beneficiary without any limitations but there is a hybrid form of charitable trust known as a charitable remainder trust (CRT) which allows the grantor the ability to make a gift to charity while still reserving some benefit for the grantor. This type of trust is particularly useful in situations where the trust involves property that has appreciated significantly in value and the outright sale would generate substantial capital gain taxes. In effect, what occurs is that the charity becomes the owner of the property but the grantor retains the income generated by the property. Once the grantor dies or terminates the trust the property reverts totally to the charity. There are three specific forms of CRTs with each involving different benefits for the charity and the grantor. Under the terms of the charitable remainder annuity trust the grantor receives a fixed percentage of the original trust property. The second form is the charitable remainder unitrust. In this form the grantor receives a fixed percentage of the fair market value of the property as opposed to the value of the property when the trust is created. This form allows the grantor to benefit in any appreciation that might occur. The final form is the charitable lead trust. In this form the grantor retains title to the property and the charity receives all the income from the property during the time that trust continues but once the trust is terminated the property reverts to the grantor or his heirs. All charitable remainder trusts must be irrevocable in order to be enforceable. The grantor, however, does maintain the authority to change the beneficiary assuming that he reserved such power at the time that the trust was created.

Chapter 6: Trust Administration

The administration of an estate is a heavy responsibility and is not one to be taken lightly. Although it may seem obvious but the first step in administering an estate is to familiarize oneself with the trust agreement. A careful reading of the agreement is necessary to provide the trustee with a roadmap of how to proceed in the administration of the trust. This roadmap will include a list of the beneficiaries; the nature of the trust property, how distributions are to made, what documentation is going to be necessary, and which state laws will govern the administration. Once the trustee familiarizes himself with the trust document he must begin to list the property funding the trust, probate any property that it is outside the trust, place claims for any applicable insurance proceeds, and clear the title of any property. Concurrently, the trustee should begin notifying the various beneficiaries named under the term of the trust. Once the property constituting the trust have been properly accounted for, probated, and titled an accounting and appraisal should be provided the beneficiaries. This serves the dual purpose of providing the beneficiaries with a clear picture of the status of the trust and makes later compliance with tax filings and other government requirements an easier task. As trusts cannot be used to defraud creditors the trustee must make sure that all possible claims against the trust are properly addressed before making any distributions under the terms of the trust. At this point, the trustee is now in a position to begin making distributions under the terms of the trust. The trustee has a fiduciary duty to the trust to distribute the proceeds in accordance with the trust language. In the case of any confusion, the trustee must present the issue to the court for direction. During the life of the trust the trustee must keep a record of all distributions until the term of the trust expires.

Chapter 7: Accounting for income and principal

In the administering any trust there are two basic units: income and principal. The principal is the property that is contained in the trust that produces income like dividends, rents, and interest. Payments for bills to the trust may be paid out of either income or principal but payments to beneficiaries may be made out from income only. Where such payments will be made lies within the discretion of the trustee. Determining the proper distribution of income and principal is one of the more important functions of the trustee. The persons who benefit from the operation of the trust may differ from the persons who are entitled to the principal when the trust terminates to an accurate balancing of payments from income and principal is essential to the proper administration of the trust.

The handling of the income and principal in a trust can be a complicated affair and can subject the trustee to some criticism from beneficiaries and so a trustee should consult an experienced professional, both legal and accounting, when making determinations in this area. There are strict and complicated tax considerations in regard to trust administration and some of these considerations differ from ordinary treatments of income and principal.

Chapter 8: Modification and Termination of Trusts

The modification and termination of a trust depend heavily upon the circumstances. The laws in this area differ depending on the jurisdiction in which the trust is governed and is essential that local statutes must be reviewed before attempting any modification or termination. Under normal circumstances, if the grantor of the trust has the capacity to approve a modification or termination such change will be approved even if such change is inconsistent with the original purpose of the trust. Even when the grantor lacks the required capacity but has signed a valid power of attorney the modification or termination will be recognized but such recognition is limited to the expressed authority set forth in the document creating the power of attorney or the trust agreement.

In the event that the grantor is unable either due to death or incapacity, the trust may still be modified or terminated if all the beneficiaries consent and the court determines that the continuance of the trust is not necessary to achieve any material purpose stated in the trust. The final distribution, if it differs from the terms of the trust, must be done in accordance with the agreement of the beneficiaries.

Chapter 9: Trusts Arising by Operation of Law

There are isolated circumstances where trusts are created by operation of law, that is, they are created automatically because other arrangements have not been made. In order to cause confusion and/or delay in the execution of certain assets, property is transferred to another through some legal arrangement or prior written assignment that has never been changed. Under the operation of law trusts are created that expedite the transfer of property so that the beneficiaries are relieved of onerous procedural requirements. Trusts created by operation of law are divided into two distinct types: resulting trusts and constructive trusts. A resulting trust is implied by the law to reflect the presumed intentions of the parties while a constructive trust is implied by law in order to effectuate justice and there is no regard afforded the parties' intentions.

Essay

A trust is a legal creation wherein a right in property, either real or personal, is held by a fiduciary for the benefit of another. The individual in the fiduciary position is identified as the trustee and he is the person who actually holds legal title to the property while the person to whom the benefits of the property flow is known as the beneficiary. Such individual holds equitable title to the property contained in the trust.

The purposes for creating trusts are numerous and can incorporate nearly every condition imaginable. Until recently, the law supporting the creation of trusts was governed largely by the state laws of the jurisdiction in which the trust was created but the adoption of the Uniform Probate Code has had considerable impact on the law supporting trust agreements and many jurisdictions have adopted the provisions of the Uniform Code.

The advantages connected to the use of trusts include minimizing one's tax liability through the use of such trust devices as the marital deduction trust, a Crummey trust, or irrevocable life insurance trusts. Each of these trusts have unique features and are specific to one's specific needs but they all share the common goal of avoiding the payment of estate taxes.

Trusts can also be utilized to avoid the need to probate one's estate upon death. Through the use of a trust arrangements can be made through the terms of the trust to provide for one's family without interruption as upon death the trustee is immediately empowered to continue operation of your business. The use of the trust also protects the deceased family from undergoing public exposure and scrutiny that might result from the public disclosure of the estate's assets at the time of the decedent's death. The records of the probate court are public and subject to inspection by anyone with an interest. Trust documents are not public record and do not have to be probated. For the most part, the contents of a trust are never disclosed to the public.