Introduction to Trust Forms
Trust forms serve as the initial framework of an estate plan as well as a potentially powerful tool in the ongoing management of assets. A trust is a legal relationship in which an individual, called the "Grantor", conveys property into a Trust for the benefit of a recipient, called a "Beneficiary". The instrument that creates this relationship is called a trust document . In order to create a valid trust, the Grantor must transfer legal title to certain property into the trust through a written instrument. Thus, trust forms are of critical importance, as they create the legal relationship necessary for an estate plan or asset management system to work.
There are a variety of trust forms, such as Family, Credit Shelter and Special Needs Trusts, among others, to meet different planning needs. This article will focus on a few of the more common trust forms.
Forms of Trust: Different Types
As discussed previously, a Trust is an in rem right, which may be defined as a right of ownership over an entity. A Trust is created by a Settlor (or Grantor) who enters into a Trust agreement establishing a fiduciary relationship in which the Settlor transfers property to a Trustee for the benefit of a third person, the Beneficiary. The Trustor places his or her property under the management of the Trustee with directions as to how the property is to be held and administered.
Turning to the forms of Trust, it should be noted that the Trustee originally had to accept the direction of the Settlor. A Trustee who accepted a Trust and then ignored the Settlor’s direction was held as personally liable to the intended beneficiary for any loss suffered because of the breach of Trust. However, now that the Trust is an in rem right, a beneficiary exists that can enforce the terms of the Trust with the emphasis on the purpose of the Trust. There exists a tendency towards liberality with respect to the wording of Trusts. In other words, the Testator’s words for the creation of a Trust must be given their broadest meaning. A Trust will not fail for the lack of adhesion to any particular means of creation or for the absence of any particular forms of words. So long as the intent of the Testator to create a Trust and its general purpose are established by the provisions or language of the Will, it will be enforced on the same basis as a Trust created inter vivos (between the living).
There are two basic forms of common law Trusts: Express and Implied. An express Trust rests on the Conscience of the individual who has control over the property, by voluntarily assuming an obligation to deal with the property for the benefit of another. An Express Trust has the following characteristics: (1) it must be a clear manifestation of intention by the Settlor; (2) it must have definite subject matter; (3) it must have a definite Beneficiary; and (4) it must have a valid purpose. It has been noted that "statutes relating to Trusts are in derogation of the right of property and consequently require strict construction and compliance with their literal terms." This means that all the requirements of the statute must be strictly observed in order to execute the Testator’s intent. These rules of strict construction presuppose that the Trust has been drawn in conformity with the statutory requirements.
Implied trusts are those which arise by operation of law, as distinguished from express trusts. Implied trusts are called constructive trusts and are defined as "an obligation which arises out of a fraud, or where the circumstances of the purchase are such that the holder of the legal title may not unjustly enrich himself by the use of the advantage of his position as the holder of the legal title." Constructive trusts are divided into resulting and constructive trusts. "A resulting trust arises from contributions by two or more persons to the purchase of property with the intention that the purchase shall inure and the property shall belong to one or more of them, other than he who has made contributions towards the price of the property." On the other hand, a constructive Trust arises out of a promise, express or implied, by the grantee, either on the face of the deed or outside of it, to hold the property in trust for the benefit of the grantor or a third person. "The grantee is then estopped from denying that such was the understanding of the parties on the principle that no man should be allowed to profit by his own fraud."
The Law in Relation to Forms of Trust
In the legal context, trust forms must comply with a variety of state and federal regulations. At the outset, the form must clearly indicate and distinguish between the grantor, trustee, and beneficiary, as well as any successor trustees and beneficiaries if applicable.
Once a decision is made about who the grantor, trustee, and beneficiary will be, and any other parties, the next step is to outline in detail the powers, rights, and duties of each party. The document must also clarify how assets should be distributed, how income should be handled, and what happens in the event the trust is terminated (either at the end of the stated term or when a named event occurs, such as a beneficiary reaching a certain age, for example). A trust generally terminates at the death of the last income beneficiary, so the document must also specify what happens to the assets at that time. It should also clarify how trust expenses will be handled, and whether there are any hider or concealment provisions.
If the document requires the signature of a notary or witnesses, these elements must be included to ensure that the document is considered valid. If the document must go through probate after the grantor dies, there may be additional requirements. These and other requirements may vary by state and by type of trust, so that is an important consideration when drafting a form.
General Benefits of Having a Form of Trust
The general benefits of using trust forms generally include continuity in management and beneficiaries, distribution of income/assets according to a schedule as opposed to lump sums, asset protection (including for creditor and divorce protection for beneficiaries), tax saving, privacy and probate avoidance. Assets transferred into a trust are not subject to the probate process and thus allow for a simple transfer of control at death and protection from creditor claims. Simple testamentary trust forms (those created by a Will and take effect at death) allow the transfer of assets under a Will, where the probate process can be avoided, estate settlement costs minimized and beneficiaries protected from some creditor claims for a period of time after death.
Revocable living trusts avoid the probate process while the Grantor is alive and provide asset protection while the Grantor is alive or incapacitated. Grantors can have control and enjoyment over assets and still receive many advantages associated with putting those assets in a revocable living trust (RLT) form.
Creating a third-party trust for beneficiaries who are minor children or disabled can avoid probate, provide for appropriate successor trustees and provide assurance that assets will be managed consistently throughout the beneficiary’s lifetime. A variety of options allow for creative planning to meet the needs of particular individuals depending on their ages and circumstances.
Marital planning and credit shelter trusts can increase the net wealth available for living and deceased spouses. Planning for married couples can maximize the estate tax exemption amounts and take advantage of Federal Tax Credit Shelter trusts, allowing for increased appreciation of wealth intended for the benefit of one or both spouses at death by keeping those assets out of the surviving spouse’s estate.
Other types of living trusts incorporate tax and Medicaid planning objectives.
Creating a Form of Trust
Lawyers or legal professionals usually prepare trust forms for individuals seeking to create a trust. The first step in the process is talking with the owner of assets to determine which assets should go into a trust, and which will remain outside of it. Next, the lawyer will select a third party trustee, someone who is impartial but familiar with the trustmaker’s wishes for their property. A third option is to have a trust company (a division of a bank that specializes in trust management) serve as trustee.
Once the assets are selected, and the trustee chosen, the lawyer will draft the document itself . The lawyer will typically suggest amendments if there are areas in which the trustmaker could have written an ambiguous provision any more clearly, or in such a way that the provision contradicts their intent. The lawyer will provide the trustmaker with a final draft of the document, and, once all questions are answered, request that they sign the trust instrument.
It is generally recommended that the trustmaker have a lawyer or legal professional review their trust form because the process can be much more complicated than simply assigning assets into a trust form. The rules for trusts vary by state, and those state laws require certain formalities.
What to Avoid in a Form of Trust
Setting up trust forms is not a simple affair, especially if you are new to the process. There are plenty of pitfalls which you should be aware of so that you can create the best possible forms for your needs.
Some of the common mistakes made in creating trust forms include:
Assuming that one type of trust form will work for everything – Sometimes, people may think that they can just use one form of trust form for all their assets. This is a mistake as different forms and structures will be needed for different assets.
Not talking with a professional – If you are looking to set up trust forms, you need to speak with a professional who is experienced in the area. If you do not do this, then you could miss out on any opportunities you may be able to take advantage of.
Skim reading on forms – Some people believe that they are able to skim read over their forms to check if there are mistakes or errors. This is not the case when it comes to a trust form. You have to read over the entire document to ensure that it meets your needs and is correct.
Not documenting how assets are handled – How assets are handled is extremely important. You should always have documentation showing how your assets are going to be handled.
Not getting it notarized – Not having your forms notarized is a common mistake. A common misconception is that notarizing a form is not needed for your trust. This is not the case as not notarizing your forms could lead to problems down the road.
All of these mistakes need to be avoided. Because of the nature of trust forms, they are legally binding and can lead to problems if they are not properly formatted.
Updating and Managing your Form of Trust
While choosing the appropriate form and method to create a trust at the necessary time will minimize the need for further review of the trust form, most trusts will continue to require updates from time to time. Depending on the specific terms of the trust, the type of trust, and the intent of the grantor, the following process may be a good way to implement ongoing management of the trust process.
Every 1 – 3 years the following should be carefully reviewed: According to Cyndi N. Curran, a partner with HBS LLC’s estate and trust litigation group, it is critical to ensure that your intentions are clearly memorialized in the appropriate form and that those intentions are being carefully followed in the administration of your trust. To help with that process, you can engage the use of an inventory/checklist of important information regarding the overall trust. This allows for the trust to essentially be completely reviewed each time you sit down to discuss the trust with your fiduciaries. It also allows you to carefully think through the issues one time, then simply refresh each item as necessary. Final review by an attorney specializing on trust issues is the last step to ensuring that everything is in order.
Conclusion
As we have seen, there are a bewildering range of forms of trusts, and they are not all called trusts. There are two main reasons for this: first, historical accidents, such as the desire of successive monarchs in the Middle Ages to keep control of their lands by giving them to trustees but retaining a right to its income; and, second, the various purposes which trusts must serve.
We have looked at some of these purposes in this blog . By thinking them through, we have seen how the civil partnership trust rules do not work for those who might expect them to protect a partner’s assets from creditors; that a bare trust is really a simple gift; that a protection trust might be a sham; and that other trusts are more complicated, or the rules less well known, and thus require more detailed consideration. Having done that, we hope that the legal and practical issues for those drafting, implementing or advising on trusts of property are slightly clearer.