The Callan Law Firm, P.C. prepares numerous types of trusts. To speak with an attorney about establishing, administering or reviewing a trust, contact our firm by clicking here. Not yet ready to speak with an attorney? Read on to learn more about trusts.
The uses of trusts are many and varied, for both personal and commercial reasons, and trusts may provide benefits in estate planning. Living trusts may be created during a person’s life (through the drafting of a trust instrument) or after death in a will.
One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors, making it “bankruptcy remote”, and leading to its use in pensions, mutual funds, and asset securitization as well protection of individual spendthrifts through the spendthrift trust.
Terms (Not all Roles Are Necessary for Simple Trusts)
- Appointer: This is the person who can appoint a new trustee or remove an existing one. This person is usually mentioned in the trust deed.
- Appointment: In trust law, “appointment” often has its everyday meaning. It is common to talk of “the appointment of a trustee”, for example. However, “appointment” also has a technical trust law meaning, either:
- the act of appointing (i.e. giving) an asset from the trust to a beneficiary (usually where there is some choice in the matter—such as in a discretionary trust); or
- the name of the document which gives effect to the appointment.
- The trustee’s right to do this, where it exists, is called a power of appointment. Sometimes, a power of appointment is given to someone other than the trustee, such as the settlor, the protector, or a beneficiary.
- As Trustee For (ATF): This is the legal term used to imply that an entity is acting as a trustee.
- Beneficiary: A beneficiary is anyone who receives benefits from any assets the trust owns.
- In Its Own Capacity (IIOC): This term refers to the fact that the trustee is acting its own.
- Protector: A protector may be appointed in an express, inter vivos trust, as a person who has some control over the trustee—usually including a power to dismiss the trustee and appoint another. The legal status of a protector is the subject of some debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also has fiduciary responsibilities then the courts—if asked by beneficiaries—could order him or her to act in the way the court decrees. However, a protector is unnecessary to the nature of a trust—many trusts can and do operate without one. Also, protectors are comparatively new, while the nature of trusts has been established over hundreds of years. It is therefore thought by some that protectors have fiduciary duties, and by others that they do not. The case law has not yet established this point.
- Settlor: This is the person who creates the trust.
- Trust deed: A trust deed is a legal document that defines the trust such as the trustee, beneficiaries, settlor and appointer, and the terms and conditions of the agreement.
- Trust distributions: A trust distribution is any income or asset that is given out to the beneficiaries of the trust.
- Trustee: A person (either an individual, a corporation or more than one of either) who administers a trust. A trustee is considered a fiduciary and owes the highest duty under the law to protect trust assets from unreasonable loss for the trust’s beneficiaries.
Trusts may be created by the expressed intentions of the settlor (express trusts) or they may be created by operation of law known as implied trusts. An implied trust is one created by a court of equity because of acts or situations of the parties. Implied trusts are divided into two categories: resulting and constructive. A resulting trust is implied by the law to work out the presumed intentions of the parties, but it does not take into consideration their expressed intent. A constructive trust is a trust implied by law to work out justice between the parties, regardless of their intentions.
Typically a trust can be created in the following ways:
- a written trust instrument created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or “living trust”);
- an oral declaration;
- the will of a decedent, usually called a testamentary trust; or
- a court order (for example in family proceedings).
In some jurisdictions certain types of assets may not be the subject of a trust without a written document.
Generally, a trust requires three certainties:
- Intention. There must be a clear intention to create a trust
- Subject Matter. The property subject to the trust must be clearly identified. One may not, for example state, settle “the majority of my estate”, as the precise extent cannot be ascertained. Trust property may be any form of specific property, be it real or personal, tangible or intangible. It is often, for example, real estate, shares or cash.
- Objects. The beneficiaries of the trust must be clearly identified, or at least be ascertainable. In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries. Beneficiaries may include people not born at the date of the trust (for example, “my future grandchildren”). Alternatively, the object of a trust could be a charitable purpose rather than specific beneficiaries.
A trust may have multiple trustees, and these trustees are the legal owners of the trust’s property, but have a fiduciary duty to beneficiaries and various duties, such as a duty of care and a duty to inform. If trustees do not adhere to these duties, they may be removed through a legal action. The trustee may be either a person or a legal entity such as a company, but typically the trust itself is not an entity and any lawsuit must be against the trustees. A trustee has many rights and responsibilities which vary based on the jurisdiction and trust instrument. If a trust lacks a trustee, a court may appoint a trustee.
The trustees administer the affairs attendant to the trust. The trust’s affairs may include prudently investing the assets of the trust, accounting for and reporting periodically to the beneficiaries, filing required tax returns, and other duties. In some cases dependent upon the trust instrument, the trustees must make discretionary decisions as to whether beneficiaries should receive trust assets for their benefit. A trustee may be held personally liable for problems, although fiduciary liability insurance similar to directors and officers liability insurance can be purchased. For example, a trustee could be liable if assets are not properly invested. However, in the United States, similar to directors and officers, an exculpatory clause may minimize liability.
The beneficiaries are beneficial (or equitable) owners of the trust property. Either immediately or eventually, the beneficiaries will receive income from the trust property, or they will receive the property itself. The extent of a beneficiary’s interest depends on the wording of the trust document. One beneficiary may be entitled to income (for example, interest from a bank account), whereas another may be entitled to the entirety of the trust property when he attains the age of twenty-five years. The settlor has much discretion when creating the trust, subject to some limitations imposed by law.
Common purposes for trusts include:
- Privacy: Trusts may be created purely for privacy. The terms of a will are public and the terms of a trust are not. In some families, this alone makes the use of trusts ideal.
- Spendthrift protection: Trusts may be used to protect beneficiaries (for example, one’s children) against their own inability to handle money. These are especially attractive for spendthrifts. Courts may generally recognize spendthrift clauses against trust beneficiaries and their creditors, but not against creditors of a settlor.
- Wills and estate planning: Trusts frequently appear in wills. Conventional wills typically leave assets to the deceased’s spouse (if any), and then to the children equally. If the children are under 18, or under some other age mentioned in the will (21 and 25 are common), a trust must come into existence until the contingency age is reached. The executor of the will is (usually) the trustee, and the children are the beneficiaries. The trustee will have powers to assist the beneficiaries during their minority.
- Charities: In some common law jurisdictions all charities must take the form of trusts. In others, corporations may be charities also. In most jurisdictions, charities are tightly regulated for the public benefit (in England, for example, by the Charity Commission).
- Unit trusts: The trust has proved to be such a flexible concept that it has proved capable of working as an investment vehicle: the unit trust.
- Pension plans: Pension plans are typically set up as a trust, with the employer as settlor, and the employees and their dependents as beneficiaries.
- Corporate structures: Complex business arrangements, most often in the finance and insurance sectors, sometimes use trusts among various other entities (e.g., corporations) in their structure.
- Tax planning: Trusts can often assist in reducing tax liability.
- Co-ownership: Ownership of property by more than one person is facilitated by a trust. In particular, ownership of a matrimonial home is commonly effected by a trust with both partners as beneficiaries and one, or both, owning the legal title as trustee.
To speak with an attorney about your trust inquiries, contact The Callan Law Firm, P.C. now.