Estate planning refers to the process of designating how your estate is to be distributed upon your death. A person’s estate consists of all of their property and can include personal items, bank accounts, real estate, stocks and securities, and various other assets. An estate plan dictates how that property is to be managed and distributed when the property’s owner dies.
Clear estate planning can lighten the tax burden left to loved ones, as well as reduce the need for any probate proceedings. If an estate plan is not in place, a person’s estate will be distributed according to their state’s intestate succession laws. These laws vary from state to state and can result in property distribution that is not in accordance with the wishes of the decedent.
Estate planning generally consists of wills and trusts. A trust is a legal arrangement in which a property interest is held by one person, or the trustee. This is at the request of another person, known as the settlor, and is for the benefit of a third person, known as the beneficiary. The trustee is legally obligated to administer the property for the benefit of the beneficiary.
This estate planning tool can be utilized in a variety of ways, and is most commonly used for their flexibility. Additionally, trusts do not require most of the formalities still required to make a legally valid will. Further, trusts may also be useful in terms of asset protection and tax planning.
What Are the Requirements for a Valid Trust?
In order for a trust to be legally valid, the following criteria must be met:
- Intent: the trust’s settlor must have intended to immediately create a trust. Specific language must be used to convey a desire or hope that a trust is to be created in the future actually violates this intent requirement, and therefore does not create a legally valid trust;
- Assets: a trust is intended to distribute assets and as such, a trust requires a presently existing interest in presently existing property. An example of this would be how a trust cannot be composed of profits that result from trading certain stocks. Expectancy does not qualify as an asset for the purposes of creating a trust;
- A Trustee: the settlor must designate a specific person to serve as trustee, and hold legal title to the trust property while managing the trust assets. However, should the settlor fail to designate a trustee before their passing, the trust will not necessarily be invalidated. A court will generally designate a trustee if none has been specified; and
- A Beneficiary: the settlor must also designate a specific beneficiary to hold equitable title to the trust. This person will receive the benefits included in the trust asset.
To expand upon these requirements:
- There must be a trust settlor, or creator;
- The settlor must deliver legal title to the property;
- The property must be delivered to a trustee;
- The trustee must hold legal title to the property;
- The legal title is to be held for the benefit of one or more beneficiaries;
- There must be the intent to create a trust;
- The intent to create said trust must be for a lawful purpose; and
- The document that embodies the trust must be executed in a valid manner.
What Else Should Be Considered When Drafting a Trust?
Different types of trusts exist to meet different needs. Express trusts are intentionally created so that the trust creator distributes property or funds to a trustee. The trustee holds the property or funds “in trust,” subject to the rights of the trust’s beneficiary. Express trusts can further be categorized as lifetime or testamentary trusts. Lifetime trusts are also known as inter vivos trusts and are set up during the lifetime of the settlor. Testamentary trusts are enacted upon the death of the settlor, generally through instructions contained in the decedent’s will.
The aforementioned trust requirements can involve various other details. Some of these details include but are not limited to:
- The settlor can generally be any individual, although some states set an age requirement;
- The trust property must be formally transferred to the trustee, in order for the delivery to be valid;
- Trust property can be either real or personal, so long as the settlor actually owns the property;
- The trust must have a named trustee, otherwise, a court will appoint a trustee;
- A trust must have one or more specified beneficiaries; and
- The trust cannot be created for unlawful purposes.
Do I Need an Attorney for Drafting a Trust?
Consulting with a skilled and knowledgeable estate attorney can help ensure your estate planning goes according to your wishes. An experienced estate attorney can also explain to you the different trusts available for your estate plan, as well as their requirements.
An attorney can also inform you of any state specific laws that may apply to your estate. Finally, an attorney can assist you in drafting and executing the necessary trust documents.