A trust is a type of legal entity in which a person or other entity holds legal title to property for the benefit of other individuals. Trusts are usually subject to state law, although tax issues related to trusts would involve federal tax law.
Basically, a trust is created when a person, the “trustor” or “settlor”, creates a legal entity by giving another individual, the “trustee”, control over their property or assets for the benefit of a third party, who is known as a “beneficiary.” Sometimes the trustee is not a person but a company, or other entity, perhaps the trust department of a bank.
Once a trust has been formed, the trustee has a fiduciary duty to act in the best interest of the trust and its beneficiaries. This would mean that the trustee does not act for their own interests or benefit, but rather for the best interest and benefit of the beneficiary.
What are Some Tips on How to Create a Trust?
There are numerous kinds of trusts, so, of course, the first thing to consider when creating a trust is which type of trust a person wants to set up. One basic issue is that trusts can either be revocable or irrevocable. A revocable trust can be changed or even revoked completely by the trustor after it is created. Alternatively, an irrevocable trust cannot be changed after it is formed. There are pros and cons to each type and which is best depends on the trustor’s goals for the trust.
Generally speaking, the terms of a trust may expressly state that the trust is irrevocable. If the document that creates the trust does not state that the trust is irrevocable, the trust will be considered revocable under current law.
In addition, there are also various types of trusts. For example, a charitable trust is one that is formed to help collect and manage funds for the benefit of a charity or a charitable cause, or for the good of the public. Another type of trust is a testamentary trust. This type of trust is usually created by the terms of a will and it comes into existence when the trustor dies.
There are at least ten different kinds of trusts. Each of them have separate legal requirements. However, all trusts must have certain basic elements in order to be considered legally valid and enforceable. Therefore, the second step in establishing a trust should include determining whether or not the basic requirements for setting up a trust can be met.
In general, for a trust to be valid the following requirements must be met:
- The trustor must have the legal capacity (i.e., mental fitness) and present intent to create not only the trust itself, but also to form the relationship with the trustee they select;
- The property or assets that will be used to fund the trust must be identifiable by either a description or from the subject itself;
- The trustor must also either specifically identify the beneficiaries or describe how the beneficiaries will be chosen;
- Once the trust has been created and the trustor has chosen a trustee, the trustor must then deliver legal title to the property or assets meant to fund the trust to the trustee; and
- There must be a valid purpose for creating the trust, which can be any purpose, as long as it is not illegal, impossible to fulfill, or contrary to public policy.
- This is only a brief list of what may be necessary to form a basic trust. It is important to note that not all of these requirements apply to every kind of trust. The formation of certain other types of trusts have additional requirements.
To avoid creating an invalid trust, a person should contact an attorney who specializes in trust and estates to draft the trust documents and advise a person about the provisions of the trust. They also can help a person decide on a type of trust to create that best serves the person’s purposes. Most important, an experienced trust attorney ensures that a trust is legally enforceable.
What are Some Basic Definitions of Terms Found in Trusts?
As mentioned above, the players in a trust situation are referred to by particular legal terms. It is useful to know trust terminology, so that it is easier to understand how a trust can be set up.
Some of the terms associated with trusts are as follows:
- Trustor: A trustor is the person who sets up the trust. They are sometimes referred to as the “settlor” or “grantor:”
- Trustee: A trustee is the person appointed to hold the property or assets in a trust for a beneficiary until the beneficiary can finally assume legal ownership of it or some other disposition is made of the trust assets. The trustee is also responsible for various fiduciary duties in order to maintain the trust;
- Beneficiary: This is the person or party for whose benefit the trust was created and who benefits from the property or assets that are held in the trust;
- Trust Res: Also known as the “corpus” or simply, “res,” it is the property or assets that fund the trust and are managed for the welfare of the beneficiary..
Additionally, trusts are created either “inter vivos,” that is, during the trustor’s life, or by a “testamentary trust,” which is a trust created by a will after the trustor’s death.
What are Some of the Advantages of Having a Trust?
There are a number of benefits to having a trust. Certain life events may actually require that a trustee serve a trust and hold its property and assets for some time.
Some of the situations in which a trust can be advantageous include the following:
- When a beneficiary has not reached the age of majority, i.e. 18 in most states in the U.S., or is not emotionally mature enough to be entrusted with full ownership of the trust property;
- Of course,there can be certain tax advantages for the trustor’s estate that make it advantageous to place property in a trust; and
- A trustor may place certain conditions on a trust that must be met before the beneficiary can take full ownership of the trust assets. For example, a beneficiary might be required to obtain a certain educational degree before acquiring the property being held in the trust.
- Or, the beneficiary may have to achieve a certain age, perhaps an age at which they might be expected to have the maturity to take ownership of assets with significant value. Also, a trustor may limit the use that can be made of trust funds. For example, uses may be limited to paying for higher education, medical care, the purchase of real property, or the like.
Other benefits that are associated with trusts might include greater accountability for one’s own funds, as well as better personal management of their finances. In other words, using a trust tends to make financial transactions more organized and establishes a record of them.
Do I Need a Lawyer to Help Me Create a Trust?
Creating a trust involves a lot of expertise. If you need assistance with the creating, drafting, editing, or reviewing trust documents, then you probably want to consult an experienced trust lawyer.
Having the assistance of a qualified local trust attorney will ensure that the process goes smoothly, that you have met all of the requirements of the laws in your state, that the trust is legally enforceable, and the it meets your goal in setting up a trust.
Additionally, in the event that a lawsuit arises in connection with the trust, your attorney can also represent you in court proceedings