Chapter 8

Trusts: Elements And Purpose

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Learning Objectives

Understand key trust terminology Understand what a trust is Understand the advantages of using a trust

Understand how to create a trust Understand how and why to terminate a trust

Understand the various types of inter vivos and testamentary trusts

Wills, Trusts, and Estates Administration, 3eHerskowitz

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Trust Terminology

Trust: the “thing” Rest/Corpus: the property for the thing Trustor/Settlor: the creator the thing Trustee: the manager of the thing Beneficiary: the recipient of the thing Trust Purpose: the stated objectives of the thing

Testamentary Trust: created as part of a will

Inter Vivos Trust: created when the trustor is alive

Wills, Trusts, and Estates Administration, 3eHerskowitz

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The Trustor

Must own the property being transferred into the trust

Can be a legal entity, such as a corporation

The trustor must have testamentary or contractual capacity to create the trust

Wills, Trusts, and Estates Administration, 3eHerskowitz

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The Trustee

Receives legal title to the property (the res)

Is a “fiduciary” Can be a legal entity, such as a bank’s trust department

Must use prudence in following the trust’s objectives

Must protect the principal, above all considerations

Can be liable for negligent mismanagement

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The Trust Property

Also called “the res,” “corpus,” “principal,” or “fund”

May not include property with restrictions on transferability, such as a government pension

Legal title rests with the trustee Equitable title rests with the beneficiaries

Wills, Trusts, and Estates Administration, 3eHerskowitz

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The Beneficiary

Holds the equitable title to the trust property

Is entitled to the trust’s income and profits, according to the trust’s plan, but isn’t entitled to control the trust

Need not have any particular level of mental capacity

Has standing to sue the trustee over the trust’s management

Wills, Trusts, and Estates Administration, 3eHerskowitz

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The Trust’s Purpose

Must be clearly stated in the trust document

May not violate the law

Example: to provide for the support of the surviving spouse, and then to distribute the principal to the trustor’s children (or grandchildren) following the death of the surviving spouse

Wills, Trusts, and Estates Administration, 3eHerskowitz

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Express vs. Implied Trusts

Express Trust written or oral the written trust is the traditional trust

must have a clear purpose

oral trusts have a real “proof problem”

Implied Trust involuntary created by operation of law

created to avoid “unjust enrichment”

“resulting” and “constructive” trusts are intended to promote fairness and prevent fraud

Wills, Trusts, and Estates Administration, 3eHerskowitz

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Testamentary vs. Inter Vivos Trusts

Testamentary Trust

trust used in a will

has no effect until the will is probated

Inter Vivos Trust

also called a living trust

takes effect upon execution of a declaration of trust

Wills, Trusts, and Estates Administration, 3eHerskowitz

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Revocable vs. Irrevocable Living Trusts

Revocable Trust can be changed or terminated by the trustor

is part of the trust’s taxable estate

Irrevocable Trust can’t be changed or terminated by the trustor

can take effect during the life, or at the death, or the trustor

Wills, Trusts, and Estates Administration, 3eHerskowitz

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Pourover Will

Also called a pourover trust

Uses a will to transfer the decedent’s property to an executed trust

Wills, Trusts, and Estates Administration, 3eHerskowitz

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When To Terminate A Trust1. Its purpose has been fulfilled

Example: the surviving spouse has died2. Its term has concluded

Example: a ten-year income distribution trust3. It has been terminated by the trustor

Example: a revocable living trust4. Its legal and equitable title merge in the same

personExample: trustee becomes the sole beneficiary after the co-beneficiary dies

5. Its beneficiaries consent to its terminationExample: the beneficiary of a college-fund trust wins the lottery and wants to refuse further distributions

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Key Elements Of A Trust Agreement1. The trust’s name2. The trust’s purpose3. The trustee’s appointment4. The trustee’s powers5. The trust’s beneficiaries6. The trust’s property7. The trust’s method of distribution8. The trust’s remainderman9. The trust’s termination10. The trust’s necessary signatures

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The Paralegal’s Role With Trusts Interviewing the trustor regarding the future trust’s assets, purpose, trustee, and beneficiaries

Researching the law related to the trust’s purpose

Drafting the trust Proofreading the trust for internal consistency