Trusts are fiduciary relationships where a trustee holds legal title to a specific trust property subject to enforceable equitable rights of the beneficiaries. The person who creates the trust must have present intent to create the trust and the trust must have a valid and legal purpose to be effective. A trust can be transferred to beneficiaries during the creator’s lifetime or by the creators will.
What Are the Requirements for a Valid Trust?
An express private trust requires specific characteristics in order to be validly created:
- Intent to Create a Trust: The settlor or creator of the trust must have present intent to actually create the trust by manifestation of definite and certain words or conduct showing intent at the time he owns the property. Expressions of future promise, hope, or mere suggestions is not sufficient to create intent.
- Trustee: A trustee must be established. A trustee is a person who will hold the trust property on behalf of the beneficiaries. Once the trustee accepts to be the trustee, he will have certain fiduciary duties in administering the trust.
- Property (Res): There has to be some type of property that is given to the trustee to manage. The trust property must be owned by the settlor or creator and identifiable. The property must exist at the time of creation of the trust and settlor must have the right to transfer into trust.
- Beneficiaries: A trust cannot be valid without having a beneficiary named to take the trust property or enforce the trust property. Any person or organization capable of taking and holding title can be a beneficiary. The beneficiaries must be definite and certain so a person would know who the property would go to, even if they are not born.
- Purpose: The trust must have a valid and legal purpose. If the trust is illegal or against public policy, the trust would be invalid.
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).
Beneficiaries must be definite and certain, meaning that they have to be ascertainable at the time of creation. 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 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 settlor must have present intent to create the trust at the time he owns the trust property and the intent must take effect immediately, not his intent to create a future trust
However, the intent to create a trust must be more than advice or "mere suggestion". 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.
If the court determines that there was no intent to create a trust by the settlors, the beneficiaries can overcome this finding by introducing evidence that the settlor did in fact have intent. This evidence may be direction written in a will or any type of outside evidence showing settlors intent to create the trust.
Does the Trust Have to Be in Writing?
Most states do not require writing for a trust that is transferring only personal property. However, if the trust property is land or property transfers, a written instrument describing the land and interest being transferred, including the signature of the person transferring property is required under the Statute of Frauds.
Some trusts are also created in the settlor’s will in which the trust will take effect at the death of the settlors called a testamentary trust. The will usually will have written directions or incorporations referencing to the trust property.
What If One of These Parties Is Missing?
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:
- You are the parent of minor children
- Privacy is important to you
- You own real property
- Your estate has a gross value in excess of $1,000,000
- You wish to avoid conservatorship or probate
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, it is wise to consult with an experienced estate planning attorney. 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.