By legal definition, a trust is a fiduciary relationship by which property is held by one or more person(s) for the benefit of one or more person(s). It may be created to manage assets, achieve tax benefits, care for beneficiaries, or for other reasons.
Creation of a Trust
A trust is typically created as part of an estate plan to, among other reasons, address what happens to property you own if you become absent, incapacitated, or deceased. The trust may be created by the owner of the property (who is also known as a “settlor,” “trustor,” or “grantor”). [I will just use the term “settlor” throughout the rest of the article to keep it simple.]
Property is then transferred to a “trustee,” who, as a fiduciary, holds and controls the property for the trust’s “beneficiaries.” The property’s legal ownership and control may be separated from its settlor’s ownership and benefits.
The Role of the Trustee(s)
The trustee is given legal title to the trust property. However, the trustee has an obligation to act in the best interests of the beneficiaries, who own the benefits of the trust. The trustee can be an individual, a public entity or a company.
Depending on the type of trust, creating a trust may have a few key benefits:
- Avoid probate and/or court intervention
- Planning for anything that may affect the property in the future
- Potential tax liability reduction
- Increased control over what happens to assets upon your death
- Keeping financial affairs more confidential
- Planning for situations other than death (disability, incapacity or mental disorder)
How to Form a Trust
To form a trust, a trust agreement is drafted and executed. Property is transferred (funded) to the trust, meaning it is transferred to the trustee named in the agreement, for administration of the trust pursuant to its stated terms.
A trust may be revocable or irrevocable. It may be formed for the benefit of children, the settlor himself or herself, a specific charity (or for more general charitable purposes), or for other purposes as determined by the creator of the trust. A trust made during the settlor’s lifetime is an “intervivos trust,” and one made at death is a “testamentary trust.”
Depending on how the trust agreement is drafted, the person or entity responsible to pay tax on the trust income may be the settlor, the trust itself, or even the beneficiaries. Because of their compressed tax rates, you will want to avoid the trust being taxed. The trust corpus or res may also create split interests, with “ownership” in the trust split between different persons (income vs. principal, or by shares in the income and principal, or by time with present and future interests). A trust may even provide that the settlor retains and interest in its trust corpus or res, which shall return to the settlor under certain circumstances. Moreover, a trust’s lifetime or term may last for a specified number of years, for the lifetime of the stated person (or persons), or even forever (if permitted by the governing state’s law).
Trust Laws in Each State
It is important to understand that state law governs the formation, operation, and termination of any trust. Different states have different laws, and different laws may apply to specific trusts. The relevant state may also vary, as it could be defined by the state in which the settlor resides, where the trustee resides, where the trust corpus or res is located, or where the beneficiaries reside. In any event, the trust agreement should state which state’s law applies, and the state should have some contact with the trust.
Depending on the goals of the person forming the trust and the governing state’s law, it can be used to achieve different objectives. Determining if you should have a trust and how it should be created is a key part of your overall estate plan. Trusts are not right for everyone, but they are extremely smart to have in place within your estate plan for certain assets and properties that you want to be protected if something should happen to you.
To learn more about trusts and to develop your estate plan, contact me today to schedule a legal consultation.
Please follow the Thomas D. Glascock Legal Blog and sign up for my monthly e-newsletter for more legal tips, information and resources on trust creation and estate planning.
