A trust is a valuable estate planning legal instrument that is used to avoid probate, while also providing a benefit for a specific beneficiary or group of beneficiaries. Although the requirements for forming a trust vary by state, the following requirements are typically necessary:
- Settlor Capacity: In order to create a valid trust, the settlor must have proper mental capacity to create the trust, meaning that they must intend to create a trust expressed with any necessary formalities of the state, such as the trust being in writing.
- Identifiable Property: Trust property, also known as “trust res,” must be specifically identifiable, which means that there must be a sufficient enough description to know what property is to be held;
- Identifiable Beneficiary: Typically, the beneficiary or group of beneficiaries must be sufficiently identifiable, meaning that they must be able to be determined at the time the trust if formed. However, in the case of a charitable trust, this is often not a requirement; and
- Proper Trust Purpose: The trust being formed must be proper, meaning that it cannot be created for an illegal reason. For instance, a person cannot create a spendthrift trust and hold the property in their own name for their benefit, simply to avoid creditors from reaching their assets. Courts will typically hold that such trusts are invalid.
Generally, all trusts in the United States are presumed to be irrevocable, unless the trust instrument otherwise states that the trust is revocable. However, this is not true in Texas, Oklahoma, or California, where trusts are generally presumed to be revocable, unless they are specified as being irrevocable.
As mentioned above, there are many different reasons that a trust may be created. However, generally the common unifying reason and purpose for creating a trust is to hold some sort of property in the trust for the benefit of another person or party.
The following is a list of the most common trusts that may be created:
- Inter Vivos or Living Trust: One of the most commonly created trust is an inter vivos trust, which is a trust that is created while the settlor is still alive. An inter vivos trust is often designed to be revocable so that the settlor can add or remove property freely during their lifetime;
- Testamentary Trust: A testamentary trust is another common trust that is created through a will, and usually becomes effective upon the death of the trust creator;
- Charitable Trust: Charitable trusts are created for the purpose of transferring and designating a person’s assets or property to a charitable organization for the benefit of a particular charity or organization. The requirements for creating a charitable trust are generally more relaxed than the requirements for other trusts, as they are often seen as being a benefit to the public;
- Discretionary Trust: A discretionary trust is a trust that allows the trustee (i.e. the person who manages the trust property) to decide when and how the trust assets and property should be distributed to the named beneficiaries;
- Special Needs Trust: Special needs trusts are created to provide for additional income for a person with disabilities, but still allow the person to be able to receive government benefits. In short, special needs trust help work around the issue of a gift or inheritance being included in the calculation of the person’s income for benefits;
- Spendthrift Trust: A spendthrift trust is a trust that is created to provide for the needs of another person, while also preventing the beneficiary from accessing the trust property. Spendthrift trusts also protect a beneficiary from themselves by shielding them from their debts or creditors; or
- Land Trust: Land trusts are trusts that allow a trustee to hold title to a certain piece of land or property, giving the trustee the power to manage the property, and make income distributions from the property.
In addition to all of the trusts mentioned above, there are numerous other trusts that may be created for other purposes. For instance, the following is a list of other less common trusts that may be created:
- Asset Protection Trusts;
- Bypass (or AB) Trusts;
- Clifford (or Short-Term) Trusts;
- Crummey Trusts;
- Implied Trusts;
- Pooled Trusts;
- Secret (and Semi-Secret) Trusts; or
- Totten Trusts (Payable on Death Accounts).
Additionally, a trust may also contain characteristics of multiple trusts. For example, it is not uncommon for a trust to be an irrevocable, express, inter vivos, discretionary, spendthrift trust. Thus, before creating a trust, it is important to think carefully about the purpose for which you are creating the trust, as one or multiple trusts may be the best solution for your particular needs.
As can be seen, there are many different types of trusts that may be formed depending on the particulars of your situation. Further, creating a valid trust is often times very complicated. Thus, if you are considering creating a trust instrument in order to provide a benefit to another party, consulting with a licensed and knowledgeable trust attorney in your area is in your best interests.
An experienced estate attorney will be able to help you select the best type of trust for your particular needs, as well as help you create the instrument itself. Having the assistance of a qualified attorney will ensure that the trust is legally binding and properly drafted.