A trust is a fiduciary relationship in which a trustor gives a trustee the right to hold title to property or assets for the benefit of a beneficiary(ies). The primary reason for creating a trust is to provide legal protection of assets, make sure wealth and assets are transferred according the wishes of the settlor (person who created the trust), and avoid or reduce inheritance and estate taxes. Trusts are also used for tax planning, estate planning, privacy purposes, and qualify for Medicaid while preserving some potion of wealth.
Elements of a Trust
In order to have a valid trust there must be: (i) intent to create a fiduciary relationship between the person creating the trust (“settlor”) and the person who will hold title, (ii) to property that must be transferred or held by a trustee; and (iii) there must be a beneficiary. Intent to create a fiduciary relationship requires that the the settlor have intent to create a trust. There generally is not a questions as to what constitutes property, but if there is a court will decide. If the beneficiary(ies) are not identifiable at the time the trust is created, a court will determine whether there was an identifiable beneficiary at the time the trust was created. If a trust is intended but a trustee is not named or a named trustee dies or resigns, a court will appoint a trustee rather than let the trust fail.
Types of Trusts
The different types of trusts include living, testamentary, funded, unfunded, revocable, or irrevocable. A trust created during the life of the settlor is called a living trust. With a living trust (also called an inter-vivos trust), is a written document in which the settlor declares that he/she holds property as the trustee or gives property to another person to hold as the trustee. If a non-settlor trustee outlives the settlor, this trustee must take part in creating and amending the trust. Living trusts can be complicated to set up, can be revocable or irrevocable, but once set up they provide more flexibility than other types of trusts.
A trust created by will is called a testamentary trust which are typically subject to the judicial supervision of the local probate court. Regular reporting usually is required for testamentary trusts, there may be restrictions on investments, and the probate court may retain control over the trust even if the family moves out of the jurisdiction. This type of trust can be set up or changed unilaterally by the creator but is irrevocable.
A revocable trust can be changed or terminated by the trustor during his/her lifetime and an irrevocable trust cannot be changed once it is established.
A funded trust has assets put into it by the trustor during their lifetime and an unfunded trust consists only of the trust agreement than can be funded when the trustor dies.
Modification and Termination
A settlor can include a provision in a trust reserving the power to amend or revoke the document as needed. If a settlor does not reserve the power to amend or revoke the document, such acts requires the consent of all the beneficiaries. If the trust has beneficiaries who are unborn or who can not be identified, a guardian or older relative might be allowed to serve for this beneficiary. Beneficiaries can ask the settlor to modify or terminate the trust or a portion of it but cannot modify or terminate a trust if doing so would violate a material purpose of the settlor.