Before creating a trust, it is important to have a basic understanding of exactly what a trust is first. A trust is a fiduciary relationship in which one party holds legal title to property for the benefit of certain individuals.
Basically, a trust occurs when an individual (the “trustor” or “settlor”) creates a legal relationship by giving another individual (the “trustee”) control over their property or assets for the benefit of a third party known as a “beneficiary.”
Once a trust has been formed, the trustee has a fiduciary duty to act in the best interest of the trust and its recipients (i.e., the “beneficiaries”).
The first step to creating a trust requires knowing which type of trust you want to make. Trusts can either be revocable or irrevocable. A revocable trust is one that can be altered or revoked by the trustor after it is created. In contrast, an irrevocable trust cannot be altered once it is formed.
Generally speaking, unless the terms of a trust expressly state that the trust is irrevocable, most trusts are considered to be revocable under modern law.
In addition, there are also various types of trusts. For example, a charitable trust is one that is formed to help collect funds for the benefit of a charity, or for the good of the public. Another type of trust is called a testamentary trust. This type of trust is usually included in the terms of a will and takes effect when the trustor dies.
There are at least ten different forms of trusts and each of them have separate requirements. However, there are certain fundamental elements that all trusts must have to be considered valid. Therefore, the second step should include determining whether or not the basic needs can be met.
In general, a valid trust typically requires the following:
- The trustor (settlor) 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 their selected trustee;
- The property or assets named within the trust must be identifiable by either a description or from the subject itself;
- The trustor must also either specifically identify the beneficiaries or at least describe how the beneficiaries will be chosen;
- Once the trust has been created and a trustee has been selected, the trustor must deliver legal title to the property or assets to the trustee; and
- There must be a valid purpose for creating the trust, which can be for any purpose, so long as it is not illegal, impossible, or contrary to public policy.
This is only a brief list of what may be necessary to form the foundation of a basic trust. It is important to note that not all of these requirements apply to every kind trust, and some categories of trust require additional details.
To avoid creating an invalid trust, you should contact an estate attorney to help you draft and review the provisions of the trust. They also can help you to determine what type of trust to create that fits your specific needs, and ensure that it is legally enforceable.
As previously mentioned, the parties to a trust are referred to by particular names. These definitions are useful to know, so that it is easier to understand the formation of the transaction.
The following are some basic definitions of terms associated with trusts:
- Trustor: A trustor is the person who creates 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 they can finally assume legal ownership of it. The trustee is also responsible for various fiduciary duties in order to maintain the trust.
- Beneficiary: This is the person or party whom the trust was created for and will ultimately benefit from the property or assets that they receive from the trust.
- Trust Res: Also known as, the “corpus,” or simply, “res,” is the property or assets that are the designated subject of the trust.
Additionally, trusts are normally created either “inter vivos” (during the trustor’s life), or by a “testamentary trust” (trust created by a will).
There are many benefits to using a trust, including certain life events that may actually require that a trustee hold the property or assets for some time.
For instance, some situations where a trust can be advantageous include:
- When a beneficiary is not of legal age or is not emotionally mature enough to receive the property yet;
- There are certain tax advantages for the person’s estate that arise from holding the property in a trust; and
- When some circumstances require it because there may be a condition placed on the trust that must be met before the beneficiary can receive it (e.g., beneficiary must obtain a certain degree before acquiring the property being held in the trust, or until the beneficiary reaches a certain salary at their job, etc.).
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.
Creating your own trust often involves a lot of effort. If you need assistance with the creating, drafting, editing, or reviewing of trust documents, then you should consider hiring a local estate lawyer that specializes in forming trusts.
Having the assistance of a qualified local attorney will ensure that the process goes smoothly, that you have met all of the requirements of the laws in your state, and that the trust is legally enforceable.
Additionally, in the event that a lawsuit arises in connection with the trust, your attorney can also represent you in court, handle negotiations for a settlement, and will already be familiar with your documents.