A trust is a legal device that permits the property owner to make transfers of that property. It also authorizes them to have the property (referred to as trust assets) managed on behalf of someone (called the trustee).
Trust laws may differ from state to state. Generally speaking, trusts are an efficient way for individuals to transfer their assets in a way that they can manage and oversee. For example, they may place specific conditions on the trust property that must be fulfilled before transferring.
What Kinds of Trusts Exist?
An express trust is an intentionally, purposely created trust. In an express trust, the trust creator distributes property or funds to a trustee, who then holds the property “in trust” (i.e., holds legal title to the trust). The trustee holds the property in trust subject to the rights of people, known as beneficiaries, who are the people entitled to the trust property.
The law recognizes two types of express trusts. The first is known as a lifetime (or inter vivos) trust, and the second is known as a testamentary trust. A lifetime trust is set up during the lifetime of the individual who created the trust. This individual is known as the settlor.
What Are the Requirements for Valid Creation of a Trust?
Typically, the requirements that must be satisfied for a trust (whether it is inter vivos or testamentary) to be valid are:
- There must be a settlor (creator);
- The settlor must deliver the legal title to the property;
- The property, also referred to as res, corpus, or trust principal, must be delivered to a trustee;
- The trustee must hold legal title to the property;
- The legal title must be held for the benefit of one or more trust beneficiaries;
- There must be intent to create a trust;
- The intent to create a trust must be for a lawful purpose; and
- The document embodying the trust must be validly executed.
What Is Trustee Compensation?
When creating a trust, it is necessary to select a trustee. This person will hold the property in trust before it is transferred from the owner to the beneficiary. This individual should be chosen carefully and should be a trustworthy person who does not stand to gain personally from the transaction.
In some circumstances, the property owner may decide to provide a monetary payment for the trustee’s services. This is known as “trustee compensation.” In some circumstances, this may be required as the trustee must often exercise their business and financial skills by investing the trust account contents when necessary.
Is Trustee Compensation Required?
State laws may differ on the rules that govern trustee compensation. In most circumstances, it’s up to the trust’s creator to resolve whether or not the trustee is entitled to compensation. This should be stated clearly in the trust agreement. There are several types of trust compensation arrangements:
- No compensation: The trustee doesn’t receive any compensation for their services. This may be desirable to avoid conflicts regarding trustee loyalty.
- Fixed compensation amounts: The trustee receives a fixed amount stated in the trust document. This will not be subject to change, regardless of the duties performed by the trustee.
- Formula: Here, the trustee’s compensation is figured according to a formula. This may involve a specific rate per hour or some other method of calculation compensation.
If state laws are silent on trustee compensation rights, the trust will usually provide “reasonable compensation” for the trustee. This is determined according to various factors, including the types of tasks performed by the trustee and the nature of the property they are managing. The trustee may also waive their rights to trustee compensation if they like.
What Are Some Additional Details to Consider When Creating a Trust?
Trust requirements can involve various details. The following are some details to consider about the conditions when creating a trust:
Trust Requirement Number One: Settlor
The settlor can generally be any person. States may impose an age requirement. A state may require that a settlor be 18 or older. A state may also require that a settlor have the mental capacity to form a contract.
Trust Requirement Number Two: Delivery
The trust property (trust assets) must be formally transferred to the trustee for delivery to be valid. This means the trustee must take legal title to the assets.
Requirement Number Three: Property
The trust property can be either real property or personal property. The only restriction as to the type of property in the trust is that the settlor must own the property at the time of trust creation and that the property is identified at the time of creation. Similarly, the settlor must have the right to transfer the property into the trust.
Trust Requirement Number Four: Trustee
For a trust to be valid, the trust must have a named trustee. Typically, for an inter vivos trust, almost anyone can serve as a trustee.
Nevertheless, concerning a testamentary trust created under court supervision, states may impose requirements upon who can be a trustee by prohibiting specific people (such as certain convicted felons or such as minors) from serving as trustees.
Typically, while a testamentary trust must always have a trustee, the failure to name one in the trust document itself is not catastrophic; the court may appoint one.
Trust Requirement Number Five: Beneficiaries
A trust must have one or more beneficiaries. The beneficiary or beneficiaries must be concrete and identifiable. That is, the names of the beneficiaries cannot be open to assumption. For instance, a trust that instructs a trustee to pay trust income for life to “all my good friends” will fail. The trust has not named definite, ascertainable people.
Requirement Number Six: Intent
The settlor must intend to create an enforceable obligation. There must be present intent to create trust by using definite words or specific conduct. The intent must be present when the settlor owns the property to be put into the trust. When an intent is uncertain, courts will examine all surrounding facts and circumstances to determine if the intent was present.
Requirement Number Seven: Lawful Purpose
Trust must be created for a valid or lawful purpose. The trust cannot require, for instance, a commission of a crime as a precondition to a beneficiary receiving funds. Correspondingly, a trust cannot be created as a way of hiding and shielding funds from creditors. Ultimately, a trust may not be against public policy.
Typically, conditions that violate public policy are those that restrict marriage or promote divorce. For instance, a testamentary trust clause may tell a trustee that a certain beneficiary will not receive trust assets unless and until that beneficiary divorces someone. Such a clause is invalid.
Requirement Number Eight: Valid Execution
A trust document must be validly executed. For trusts that transfer real property, this means that the trust must be in writing and signed by the settlor. Some states require that trusts transferring only personal property be in writing, while other states do not impose this requirement.
What if There Are Any Trustee Compensation Disputes?
A common trustee compensation dispute is where a beneficiary contests the amount of compensation that the trustee is entitled to. For example, if the trustee has performed poorly or caused a beneficiary loss, it could be reflected in their compensation amount. In severe cases, the trustee may even be subject to removal, especially in cases where the trustee breaches their fiduciary duty.
Should I Hire a Lawyer if I Need Help With Trustee Compensation Issues?
Trustee compensation laws and rules may vary by state. A trust agreement should include obvious and specific instructions regarding trustee compensation to avoid legal issues.
If you have any problems or concerns regarding trustee compensation, you may wish to hire a trust lawyer for help. Your attorney can help with drafting or editing such documents and represent you in court if you need to file a lawsuit.