Creating a Trust

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What Is a Trust?

Trusts are fiduciary relationships where a trustee manages property on behalf of one or more beneficiaries. Trusts are not public documents, but private arrangements between certain parties. Trusts are often favored in estate planning because they do not go through the probate system. Trusts are also favored because of how they interact with various tax laws.

Who Should I Designate as Parties to my Trust?

There are typically three main parties to a Trust: 

  1. The Trust Creator: the original owner of the property to be transferred to and held by the trust.
  2. The Trustee: the entity (such as a person or financial institution) that holds the legal title to the trust estate. There may be more than one.
  3. The Beneficiaries: the intended beneficiaries from the trust estate. There may be more than one.

What Are the Requirements for a Valid Trust?

Creator’s intention to create a trust.

When Can I Create a Trust?

You must be alive and have the mental capacity to enter into a contract. Unless you meet these two criteria, your trust may be successfully disputed by those who claim that you lacked capacity to create the trust.

A trust is created when the trust creator declares that a trust is created or if the trust creator uses a deed of trust to give property to a trustee. The trust creator does not have to use any magic words such as "I establish this trust." A court may recognize the validity of a trust if the court finds that the trust creator intended to make a trust.

If the trust creator and trustee(s) are different entities, the trust creator must give the trustee(s) either the actual property or the deed of the property. For example, if the trust creator wishes to place a painting into the trust, the trust creator must actually give the painting to the trustee(s). If the property is real estate, the trust creator must give the deed to the trustee. If the trust creator and the trustee are the same person though, this rule does not apply.

Who Is a Valid Beneficiary?

The trust creator can make anyone a beneficiary. This includes spouses, children, parents, employees, co-workers, friends, and pets. Groups of people can be beneficiaries, such as siblings. Even the trustee and the trust creator can be beneficiaries as long as there is an independent beneficiary (i.e. the trustee cannot be the sole beneficiary and the trust creator cannot be the sole beneficiary).

The only invalid beneficiaries are those who are too ascertainable. Although friends can be beneficiaries, they should be sufficiently described, if not named. Although "my friend Joe" might be valid, "friends," as a group, is too vague. Group beneficiaries, such as "my children" or "my siblings" should be specific enough that a court can figure out who the beneficiaries are intended to be.

How Does a Court Find Intent to Create a Trust?

There are not many strict guidelines on how a court may find intent to create a trust. The typical method of finding intent is if there is a transfer of property from one individual to another individual for the benefit of a third individual.

However, the intent to create a trust must be more than advice or prayer. If a document, such as a will, says that the creator "wishes" or "hopes" or "recommends" the creation of a trust, then those words will NOT be evidence of intent to create a trust.

What Counts as Trust Property?

One of the requirements is that the trust property should be held by the trustee. There is no trust if there is no trust property.

Trust property can be tangible items, such as necklaces, pianos, or real estate. Life insurance and pensions can also be held in trust, although it is very rare for those properties to be in trust since they are automatically given to beneficiaries upon certain events (such as the death of the insurer). Stocks, interests in property, and other sources of income can also be given in trust.

Almost any property can be placed in trust. However, there are certain guidelines governing what may be included in a trust. The trust creator must have an actual interest in the trust property. Mere expectation of interest in property cannot be trust property.

For example, profits from stock are not always considered trust property because the profits may not actually appear. This doesn’t mean that beneficiaries cannot be given profits from stock. If the terms of the trust grant beneficiaries the stock profits, the beneficiaries can still receive the profits. However, if there is no other property in the trust other than expectation of profits from stock, than the trust is invalid.

The second guideline is that any money given to beneficiaries should be easily traceable. This guideline ensures that actual property was passed to the trustee and to ensure that the trustee does not abuse the trust for his or her own ends.

Trust law can differ by state. Be sure to check your state’s trust property laws to ensure that you are following all requirements.

What is a Valid Trust Purpose?

It is probably easier to say what is not a valid trust purpose. A trust is not valid if it violates a law or if it violates public policy. For instance, a trust is likely to be invalid if its primary purpose is to evade taxes.

What If One of These Parties Is Missing?

Beneficiaries are covered above.

A trust must have a trust creator who made the trust. After the trust is created, the trust no longer needs its creators, although it is extremely common for a trust creator to modify the trust after creating it.

Although the trustee has tremendous responsibilities to both the trust creator and the beneficiaries, courts have declared that "trusts never fail for want a trustee." If there is no trustee named in the trust, courts will typically appoint one.

Should I Set Up a Trust?

You should discuss the advantages of a trust with an attorney if: 

Can I Create a Trust, Serve as the Trustee and Be the Trust Beneficiary?

The answer: it depends. Historically courts concluded that a trust was not necessary when the trustee was also the beneficiary. In most states now, a trust creator may establish a revocable trust, serve as the initial trustee, and be able to obtain immediate benefits as a beneficiary from trust property. The trust is legal as long as there is more than one beneficiary.  

In other states, courts find that the creator of the trust has not relinquished enough control over the trust property to create a valid trust.  It is what courts commonly refer to as an "illusory" or "sham" trust. 

Do I Need a Lawyer to Draft a Will or Trust?

If you choose to create a will or trust, consulting with an attorney experienced in estate planning is always a wise thing to do. The potential tax implications and legal formalities of will and trust drafting make a lawyer's counsel indispensable. A lawyer can explain all your options and help you understand what types of wills or trusts are right for you and your family.

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Last Modified: 01-28-2014 02:37 PM PST

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