Uniform Trust Code and Custodial Trusts

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 What is a Trust?

A trust is a tool that is used in estate planning. It holds the owner’s property for the benefit of another individual or individuals, called the trustor(s) or settlor(s). The creator of the trust is known as a trustor.

The trustee is an individual who oversees the trust. They have certain duties to use and protect the contents of the trust for the benefit of the beneficiaries.

A trust may be created for a wide variety of reasons. It may be created for:

  • The financial benefit of the trustor;
  • Financial support for a surviving spouse and/or minor children; or
  • A charitable purpose.

There are numerous different types of trusts. In a custodial trust, for example, the beneficiaries have the authority to make decisions concerning the trust funds.

Although there are many different types of trusts they all fall into one of two categories, living or testamentary. An inter-vivos, or living trust, begins during the life of the trustor. A testamentary trust transfers property into the trust after the death of the trustor, through their will. The trust property in a testamentary trust must go through probate prior to the creation of the trust.

Other types of trusts include:

  • A revocable trust;
  • An irrevocable trust;
  • A credit shelter trust; and
  • A spendthrift trust.

A revocable trust is a trust that is created when a trustor is still living. When the trustor passes away, the trust becomes irrevocable. This type of trust gives the trustor the freedom to revoke or modify the trust however they see fit without needing the consent of another individual.

An irrevocable trust may be created while the trustor is still alive. It is different from a revocable trust because it cannot be revoked or changed by the trustor after its creation without the consent of the beneficiary or beneficiaries.

A credit shelter trust is created by the trustor because it provides them state and federal tax exemptions. These benefits apply to the exceptionally wealthy and whose fortunes exceed the multi-million dollar limit.

This type of trust also permits a married investor to avoid estate taxes when passing assets on to their heirs. Upon the death of the trustor, the assets outlined in the trust agreement are transferred to the beneficiaries. Additionally, the trustor’s spouse maintains the rights to the assets of the trust and any income generated during their lifetime.

A spendthrift trust gives a trustee full authority to make decisions regarding how the trust funds are spent for the benefit of a beneficiary who is not financially responsible or has a large amount of debt. Creditors of the beneficiary cannot seize the funds of the trust.

There are, of course, many other types of trusts not discussed here. An attorney can provide information regarding what type of trust is best to accommodate their wishes.

What Can Be Put in a Trust?

A trust contains assets. Assets such as real estate or stocks and bonds required the title of the asset to be transferred to the name of the trust. This does not apply to personal items such as jewelry, clothing, and furniture.

There are some items such as life insurance policies, retirement accounts, and health savings accounts that generally cannot be transferred to a trust because the distribution of these items are determined by the beneficiary that is named on the individual policy. In order for these assets to be placed in a trust, the named beneficiary for the policies must be the trustee of the trust.

What is the Uniform Trust Code?

The Uniform Trust Code (UTC) is a body of laws that is used by some states to create uniformity in their trust laws. It covers the following aspects of a trust:

Approximately half of the states in the United States use the UTC as a default trust statute, or have adopted a modified version of it.

What is the Uniform Custodial Trust Act (UCTA)?

The Uniform Custodial Trust Act (UCTA) is trust legislation. It was passed in 1987. Among other things, it permits individuals to create a simplified version of a custodial trust. This allows an individual to take advantage of the benefits of a trust without having to devote precious funds to the trust creation process.

Pursuant to the UCTA, an individual can create a custodial trust simply by executing a statement that the property or funds are being placed in a custodial trust according to the Act. This statement can be made in a separate document or in a provision within an existing document. When the trustee accepts the property, their obligations to the trust begin. The property of the trust will then be transferred to the named beneficiary according to the trust provisions.

What is a Custodial Trust?

A custodial trust is a bank account, trust fund, or brokerage account which is created for a beneficiary but held in trust by a responsible individual. This individual is called a custodian, instead of a trustee. The custodian owes the same fiduciary duty to the beneficiary to handle the assets in the trust for the best interests of the beneficiary.

Pursuant to the UCTA, a custodial trust is different from a regular trust due to the amount of control the beneficiaries have over the trust property, and to some extent, over the trustee. Under common law trust rules, the trust property typically cannot be subject to the direction of the beneficiaries.

However, in a UCTA custodial trust, the beneficiaries may:

  • Terminate their share of the trust;
  • Direct a trust payment to themselves;
  • Direct trustee management or investment of trust properties, to some degree;
  • Direct the trustee to distribute their trust share to another individual at the time of their own death; or
  • Allow the trustee to assume control of their interest if they become incapacitated.

The amount of control exercised by a beneficiary of a custodial trust is one of the reasons why a trust under the UCTA is known as a custodial trust. This is because the beneficiaries are seen as custodians of the trust property. The trustee performs more administrative functions rather than assuming a major decision-making role.

Who Usually Uses a Custodial Trust?

Any individual can create a custodial trust so long as they follow the guidelines provided in the UCTA. Generally, a custodial trust is typically used by:

  • Individuals wishing that they could manage their property in the event that they become incapacitated;
  • Individuals who need to manage property without using a of a power of attorney, such as individuals going on extended travels or trips; or
  • Older individuals with accumulated assets.

Do I Need a Lawyer for Help With the Uniform Trust Code and Custodial Trusts?

Yes, it is essential to have the assistance of an trust lawyer for Uniform Trust Code and custodial trusts. A custodial trust is a specific type of trust with specific requirements. An attorney can help you create, review, or enforce a custodial trust.

An attorney can advise you on how the UCTA functions and what options you have for creating a trust. There are limitations and benefits to a custodial trust. An attorney can also assist you in filing a lawsuit regarding a trust, if necessary, and represent you during any court proceedings.

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