Overview
Trusts are essentially creatures ofTypes of trusts
There are numerous variations of trusts that exist in the United States. Listed below are some of the more common examples of trusts that are formed.The "three characters" in the play
A trust generally involves three "persons" in its creation and administration: (A) a settlor or grantor who creates the trust; (B) a trustee who administers and manages the trust and its assets; and (C) a beneficiary who receives the benefit of the administered property in the trust. In many instances where a revocable living trust is involved, one person can serve as grantor, trustee and beneficiary simultaneously until they die. In many other instances, especially after the death of the initial grantor, there will be different persons named to be trustee(s) or beneficiary(ies). There can be more than one of any of these "persons" in a trust at any one time.The settlor/grantor
Strictly speaking, the Grantor of a trust is merely the person creating the trust, usually by executing a trust agreement which details the terms and conditions of the trust. Such a trust can be ''revocable'' or ''irrevocable''. A revocable trust is one in which the settlor retains the ability to alter, change or even revoke the trust at any time and remove funds from it at any time. It is sometimes also referred to as a grantor trust. ''See below''. Unlike under older common law rules, the Uniform Trust Code presumes that all trusts are revocable unless the terms of the trust specifically state otherwise. Generally, the Grantor is also the one charged with funding the initial assets into the trust, either through an instrument (i.e., deed, security certificates, accounts retitled into the trust's name) or by a declaration (i.e., for tangible personal property without a formal title). From both a historical and practical perspective, trusts have generally been designed to have only one grantor. This is due to the complications that can arise, particularly in non-community property jurisdictions, in determining the nature of property deposited into the trust and the proportionality of the multiple grantors' contributions within it. However, a growing trend for husbands and wives is to create "joint trusts" where both are "grantors" of the trust, thus mirroring the familiar concept of joint tenancy ownership.''Id.'' For a revocable trust, the grantor retains the power to direct transactions for the trust, even if a third party serves as the trustee. This may even include situations where there may be a conflict in the grantor's direction and the actual terms of the trust. In an irrevocable trust, there has developed a growing use of a so-called trust protector. This is generally an unaffiliated, third party (often a lawyer or an accountant) who is granted the power to amend or change the terms of the trust in order to accommodate unexpected changes in tax or fiduciary law, unexpected changes in the trust's circumstances or other contingencies. The Code permits the use of such third parties to amend or alter even an irrevocable trust. The trustee is to act in accordance with such powers unless "the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust." Furthermore, the Code assumes such trust protectors act in a fiduciary capacity and must act in good faith with respect the trust's purposes and the best interests of the beneficiaries. The term "grantor trust" also has a special meaning in tax law. A grantor trust is defined under the Internal Revenue Code as one in which the federal income tax consequences of the trust's investment activities are entirely the responsibility of the grantor or another individual who has unfettered power to take out all the assets. Unlike other trusts, the grantor trust completely passes through all income tax consequences of transactions inside the trust and the trust itself is a virtual shell. This is generally favorable in the current tax climate since in most cases less income will be taxed when a trust is treated as a "grantor trust."The trustee
Trustees are the persons appointed to manage all duties required for the trust to function. In most cases, the acting trustee (and the successor to that trustee in the event the trustee can no longer serve) is named specifically in the trust instrument. A person nominated as a trustee can decline to serve as a trustee or if serving may choose to resign as a trustee upon notice to the trust's beneficiaries. Also, in some instances, the trust instrument can specify that trustees can be removed. Any Grantor of a revocable trust would implicitly hold this power with a third-party trustee, given their power to amend or revoke the trust. In an irrevocable trust, the trust instrument may, in some instances, grant the beneficiaries a power to remove a trustee by a majority vote. Absent this provision, in most UTC jurisdictions, other co-trustees or beneficiaries can remove a trustee only by court action. However, the threshold for removal under the UTC is not substantial. In most cases, all the court must find is that there has been a "substantial change in circumstances" in which removal would "bestDuty of prudent administration
It goes without saying that the trustees essentially "run" the trust. They are responsible to collect trust assets, collect receipts from trust investments, pay required expenses of the trust, enforce and defend claims on its behalf, determine what amount (if any) to distribute to beneficiaries as provided under the trust agreement, properly make a record of such receipts and disbursements, and many other tasks. The UTC generally states that trustees must conduct these activities in "good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with thisDuty of loyalty
One of the oldest and most venerated duties of trustees has been to avoid "Duty to keep records and report
Trustees are required to keep beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. If a beneficiary asks for information, the trustee is charged to give it (unless the request is somehow unreasonable under the circumstances). This includes providing the beneficiary a copy of the trust agreement, notice of the acceptance or change of trustee and the contact information for the trustee, notice that a trust has become irrevocable due to the grantor's death, and any changes in the trustee's rate of compensation. The trustee must also keep adequate records of the administration of the trust generally. All trust property must stay separate from the trustee's own personal property and must not be "commingled." A trustee can hold certain securities, usually publicly traded ones, in a "street name" or nominee registration for ease of management. However, they are still subject to the rule that such securities must be "earmarked" specifically in records to a specific trust account.The beneficiaries
The generic term "beneficiary" under the Uniform Trust Code is defined as a person that (A) has a present or future beneficial interest in a trust, vested or contingent; or (B) in a capacity other than that of trustee, holds a power of appointment over trust property. Beneficiaries are the holders of "equitable title" of trust assets and receive the benefits of trust property, subject to the trustee's "legal title" ownership and control under the terms of the trust agreement as established by the grantor. The Code makes a distinction between certain classes of beneficiaries with respect to the traditional reporting requirements for trustees with respect to the assets and transactions actually held in the trust. Under the older common law, only current beneficiaries (sometimes termed "income beneficiaries") were entitled to receive reports or accountings of trust transactions and that such reports were sufficient to protect the interest of those current beneficiaries. However, the Code has now permitted "qualified beneficiaries" to at least be informed of their right to receive a trustee's periodic report of trust transactions and assets and are entitled to receive it if they do in fact request it. "Qualified beneficiaries" are defined as a beneficiary who, on the date the beneficiary's qualification is determined: (A) is a distributee or permissible distributee of trust income or principal; (B) would become a distributee or permissible distributee of trust income or principal if a present distributees' interest ended on that date without causing the trust to terminate; or (C) would become a distributee or permissible distributee of trust income or principal if the trust did terminate on that date. Essentially, this means that future beneficiaries (i.e., children or grandchildren) might be exposed to information that the grantor only intended to pass to the current beneficiaries. Although the UTC limited the reporting requirements to trustees accepting duties after the Code's enactment, a number of states have changed the standard UTC language, often in response to concerns from corporate trustees of the unwieldiness of such requirements and the danger that future trust beneficiaries may interfere and create contention concerning the operation of the trust.Purposes of a trust
The purposes and uses of trusts historically had to do with management of property in absence of owner, mostly during medieval times when a lord left to fight in battle. Gradually, the device also found usefulness to control property "beyond the grave", although the so-calledAsset management
Trusts are generally unique in that they can provide comprehensive asset management for multiple family generations over great spans of time, something which other estate planning devices cannot completely replicate. Trusts can hold title to a virtually infinite number and type of disparate assets, from publicly traded securities, to illiquid closely held business interests, to real estate, to even collectibles and tangible personal property. Unlike other methods of transferring title, the trust allows continued management of the assets, despite the infirmity or even death of the ownerallowing them to specify to successor trustees exactly how to manage the property and use it for the future beneficiaries. This can extend for multiple generations or even, in some jurisdictions, in perpetuity (as some states have permitted in some instances the creation of trusts that can last beyond theEstate tax avoidance
Trusts are often created pursuant to an estate plan for wealthy individuals to avoid the effects of the federal estate tax. Under current federal estate tax law, in 2008, individuals that own interests in any property (individually owned, jointly held, or otherwise) which exceeds a fair market value of $2 million is subject to the estate tax at death; in 2009, the amount is $3.5 million. In 2010 there is no federal estate tax unless Congress acts. An estate that exceeds that value will pay tax on that excess at a rate of 45% under current law. Naturally, this rate is a huge inducement among many with substantial wealth to use various estate planning devices to reduce or eliminate the effect of the tax for their family. Below is a brief summary of certain specific techniques that employ trusts as the vehicle for achieving such savings. At the end of 2010 Congress created a two-year window with a 35% estate tax rate and an exemption level of $3.5 Million. Currently as of 2020, the exemption is $11,580,000.The credit shelter trust
The credit shelter trust is by far the most common device used to extend the applicable credit ($10 million in 2018) for married couples. In this technique, each spouse creates a trust and divides their assets (usually evenly) between the two trusts. The terms of the credit shelter trust provide that upon the first spouse's death, the other is left an amount in trust for the benefit of the surviving spouse up to the current federal exemption equivalent to the federal estate tax. Thus an individual would leave, say, $10 million in trust for his wife (keep the $10 million out of her estate), give his widow the net income from his trust, and leave the remaining corpus to his children at her death. The Internal Revenue Code does not consider the assets in the first spouse's trust includible in the surviving spouse's estate at death for estate tax purposes, because the spouse's rights to the principal of the "credit shelter" trust do not constitute full ownership of the trust assets. In essence, this allows the couple to now shelter $20 million in assets rather than just $10 million (at the death of the second spouse). The "Credit Shelter Trust" can permit the surviving spouse to also access principal from the trust. However, the IRS generally limits this power to distribute principal only for the "health, education, maintenance or support" of the surviving spouse. This language is relatively broad in its practical application; however, the IRS has agreed it is a sufficient limitation to allow the "credit shelter" trust not to be counted in the estate of the second spouse when she dies. An additional benefit of the "credit shelter" is that future appreciation of trust assets passes on to the future beneficiaries (i.e., children or grandchildren) free of the estate tax. So, for example, if the surviving spouse lived another 10 years and the assets inside the first spouse's "credit shelter" grew to $15 million, the appreciation would pass to the children without estate tax on the increased value, since the estate tax value was "locked in" at the first spouse's death. The "credit shelter trust" generally only works for married couples since (a) the tax code provides the opportunity to shift assets between married persons for an unlimited amount by means of the unlimited marital deduction; and (b) unmarried persons attempting to do the same would be impacted by the "gift tax" during life. However, the mechanism is often useful in ''multiple'' marriage situations to allow for the use of income by the spouse while also conserving principal for the children later after the "stepparent" passes away.Charitable remainder / Lead trusts
Trusts are often created as a way to contribute to a charity and retain certain benefits for oneself or another family member. A common technique is to create a charitable remainder unitrust ("CRUT"). Typically, these irrevocable trusts are funded with assets that are often highly appreciated, meaning their cost basis for capital gains tax purposes is very low relative to their current fair market value. This can be real estate, highly appreciated stock or a business interest with a low (or zero) tax basis. Once the trust is funded, typically the asset is sold and invested in a more diversified investment portfolio that can provide income orGrantor retained annuity trusts
Trusts may be created to get funds to the next generation where there is significant wealth and federal exclusionary gifts have already been used up. A common such vehicle is called the grantor retained annuity trust (GRAT). Federal tax law specifically allows for this vehicle. Here the grantor places an asset in the trustone he expects will grow rapidly during the term of the trust. The document then requires the trustee to pay to the settlor a specific sum of money (the annuity) at certain intervals during the life of the trust. If there are assets in the trust at the end of the term, those assets go without estate or gift tax to the remaindermen. Here's a typical case: settlor owns large block of low cost basis stock in a publicly traded company. He does not wish to sell the stock and pay capital gains tax. He also has estate tax problems since his net worth when he dies is likely to be $10 million or more. His attorney drafts a GRAT in which he places $2 million of the single company's stock. The document calls for the smallest legal interest rate (published monthly by the Federal Government), which is then paid through the term of the trust. Upon the termination of the trust, the annuity has been paid back to the grantor and the remaining corpus is delivered to the remaindermen (typically children) without tax. Money has now passed from the grantor to his/her children without gift or estate tax. There has been no capital gains tax.Government benefit protection
Trusts may be created to protect an individual's welfare or other state benefits. These are typically called "special needs trusts." Typically, an individual hasCreation of a trust
A trust may be created by: (1) transfer of property to another person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death; (2) declaration by the owner of property that the owner holds identifiable property as trustee; or (3) exercise of a power of appointment in favor of a trustee. The ancient rule from English common law is that a trust is not established until it has property or a ''res''. However, the actual property interest required to fund and create the trust is nothing substantial. Furthermore, the property interest need not be transferred contemporaneously with the signing of the trust instrument. Many trusts allow for additional deposits (cash, securities, real estate, etc.) at the direction of the settlor or others, provided the trustee is willing to accept those assets. It can even be funded after death by a "pour-over" provision in the grantor's last will, specifying his or her intent to transfer property from the estate to a trust. It can also be created by a court order or statute, imposing certain rights, duties and responsibilities as to particular property.Intent
Trusts have certain requirements for creation. First, the grantor must show an intent to create a trust. Concordantly, the grantor must have the mental capacity to form such an intent and to create the trust. Also, if the grantor was "forced" to create the trust due to fraud, duress or undue influence, it is deemed void. Nearly all trusts created by individuals are the subject of some type of writing (either a trust agreement or a will), which provides evidence of not only the intent to create the trust, but the intended operative terms of it. However, abiding by the old common law rules, the Uniform Trust Code does recognize that a trust can be created ''orally''. However, to prove the terms of such a trust can only be established by "clear and convincing evidence." Such oral trusts are extremely rare in modern practice. Occasionally, the intent to create a trust is manifested not by a writing ''per se'' but by the circumstances in which the "grantor" has entrusted the care of property to another party. This is often referred to as a constructive trust or a resulting trust. Again, such devices are generally rare and are created as the result of a court-imposed equitable remedy due to litigation between parties as to the "ownership" of certain property.Definite beneficiary
Second, the trust must have some "definite beneficiary"a person or class of persons whose identity can be determined in some fashion. The persons' specific identities need not be "known" at the time the grantor creates the trust; it will be sufficient if the persons can be "readily ascertainable" within a certain time period. That time period, historically, was determined under the old English common law "Active trustee
The third requirement under the UTC is that the trustee must have duties he or she must perform. Otherwise, if the beneficiaries are able to manage the property as they wish, there is no "trust" ''per se.''No merger of property interests
Finally, the UTC requires that a trust must not have the same person as the sole trustee and sole beneficiary. Under ancient common law principles, a trust could not exist unless there was at least some "title split"that is, the same person cannot generally hold all legal and all equitable title at the same time. If the legal and equitable title merge in the same person, the trust is considered nonexistent under the so-called merger doctrine.Validity of trust in other jurisdictions
The UTC states that a trust is valid if, under the law of the jurisdiction in which it was created, it was properly created. In most cases, this would be the law of the jurisdiction of the grantor's"Oddball" trusts
The UTC also covers a trust created for the purpose of caring for an animal that was alive at the time of a grantor's death or a trust for a non-charitable purpose but does not have an ascertainable beneficiary (such as a cemetery trust.) The Code imposes several limits on such trusts. First, the trust can only last as long as the lifetime of the animal (or the last surviving animal in a group) or in the case of a cemetery trust, no more than 21 years. Also, the trust's corpus can only be applied to the intended use of caring for the animal or the cemetery plot. In essence, then, a court can determine that if the trust has property that exceeds the amount required for the animal's care, the court may intervene and distribute the funds to the grantor's successors in interest.Termination / reformation of a trust
With the exception of certain charitable trusts that can run perpetually, virtually all trusts with individual beneficiaries must end at a date certain. Of course, if a grantor has the power to do so, a trust terminates when it is revoked. Grantors also may amend the trust as they see fit during their lifetime, so long as they continue to retain the capacity to do so. For irrevocable trusts, the trust terminates when a trust "expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve." Most typically, such events occur when a certain class of beneficiaries receive all trust property outright, free of the restriction of the trust agreement, and trust administration is then "wrapped" up and the trust closed. In some instances, however, it may be desirable to change the trust's terms or even terminate the trust by a method that the original grantor did not contemplate. For example, the trust may be depleted to such an extent that the management of the trust by a professional may be uneconomical. Changes in the law or circumstances surrounding the formation of the trust after the death of the grantor may dictate changes in the terms of the trust (or the termination of the trust itself.) The most infamous example would be beneficiaries who clamor against the trustee to "bust the trust" based on the strict limits the trust (or the trustee) may impose on the trust assets. In many of these cases, the UTC provides beneficiaries (and trustees) relief to provide the flexibility needed to dispose of trust property under certain rules.Reformation / Termination by consent
The Code, in section 411, permits the modification or termination of a non-charitable irrevocable trust if: (a) the grantor and all beneficiaries consent and (b) a court of proper jurisdiction approves it. The court can approve such change or termination even if such may be inconsistent with the original purposes of the trust. Also, if the grantor does not consent (or is deceased) but if all beneficiaries of a non-charitable irrevocable trust consent, upon a petition to a court, the trust can be terminated "if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust." The court may also reform the trust with all beneficiaries' consent as long as the change is not inconsistent with a material purpose of the trust. The rationale for this difference lies with the grantor. If the grantor is living and consents to a change that radically changes the trust or eliminates it altogether, the UTC permits parties to essentially undo what originally was intended not to be undone. If the grantor is dead or does not consent, the UTC presumes the grantor would not want a "material purpose" of the trust compromised, regardless of the beneficiaries' wishes. The consent of "all" beneficiaries might seem virtually impossible to obtain. Certainly, some such "representatives" for beneficiaries are obvious (i.e., guardians for incapacitated persons, parents for minors, etc.) However, the UTC provides rules to allow certain persons as beneficiaries to represent other far-removed, potential beneficiaries and their interests. The key is whether the beneficiaries that may "stand in" and bind the distant beneficiaries is whether they have a "substantially identical interest with respect to the question...."Reformation to "fix the trust"
The Code permits a court to reform (or terminate) non-charitable irrevocable trusts to essentially make them work better, to fix a problem that has developed due to changes in the law or surrounding circumstances, or simply correct mistakes in the trust. If the change is due to "unanticipated consequences", the court's goal under the code is to fix the problem "in accordance with the settlor's probable intention." The terms of the trust can be changed if continuing the trust under its terms would be "impracticable or wasteful, perhaps unneeded" if the settlor's intent and trust terms were the result of a mistake in fact or law, or to achieve the imperfectly completed tax consequences of the settlor.Termination to close uneconomical trusts
The Code also contains a provision to allow a trustee with a trust that has a marginal sum of assets to terminate it. After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property having a total value less than $50,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. A court can also (regardless of the dollar amount) modify or terminate a trust or remove the trustee and appoint a different trustee if it determines that the value of the trust property is insufficient to justify the cost of administration. Upon termination under these provisions, the trustee is to distribute the funds "in a manner consistent with the purposes of the trust." Typically, this would mean outright distribution to the qualified beneficiaries of the trust in proportion to the actuarial value of their interests.''Id.,'' Section 414, comment, p. 73.Income tax implications
Fiduciary tax law is both federal (see the Internal Revenue Code) and state. For Federal income tax purposes in the United States, there are several kinds of trusts: ''grantor trusts'' whose tax consequences flow directly to the settlor's Form 1040 (U.S. Individual Income Tax Return) and state return, ''simple trusts'' in which all the income created must be distributed to one or more beneficiaries and is therefore taxed to the non-settlor beneficiary (e.g. the widow of a trust created by the late husband), whether or not the income is actually distributed (it happens), and ''complex trusts'', which are, in general, all trusts that aren't grantor trusts or simple trusts. Some trusts may alternate between simple and complex under certain conditions. Many but not all trust organizations do their own tax work, which can be highly specialized. All simple and complex trusts are irrevocable and in both cases any capital gains realized in the portfolios are taxed to the trust corpus or principal.See also
* Uniform Gifts to Minors Act * English trusts lawNotes
References
* {{Law of the United States Wills and trusts Law of the United States United States trusts law