What is a trust
a mechanism for holding property whereby title is split between legal owner (trustee) and the equitable owner (beneficiary)
Trustee
- legal owner but usually doesn’t have the power to enjoy the property
- Fiduciary
Three parties to a trust
In trusts there are three parties: transferor (also known as settlor or trustor) who owns full legal title, transferee, and the beneficiary
Formalities of creation
- Created when one person transfers property to another on condition that the latter will use and manage the property for the benefit of the beneficiary
- Trustee has to either explicitly or implicitly promise to comply with conditions in exchange for the transfer
Two ways created by trusts
Deed = transfer ownership of property from one individual entity to another (settlor to trustee)
a) Appropriate when the settlor and trustee are different
b) Must be in writing but need not follow formalities of wills
c) Deeds involving real property must comply with S.O.F which in most states requires in writing and witnessed
Declaration = Settlor and trustee are the same person
a) Must be in writing if involving real property pursuant to SOF
b) Not in writing if involves only tangible personal property
Elements of a trust
a) Settlor has capacity
b) Settlor indicates an intention to create the trust
c) Trust has a definite beneficiary or is
i) Charitable
ii) Trust for care of an animal
iii) Noncharitable as defined in Section 409
d) Trustee has duties to perform and
e) Same person is not the sole trustee and sole beneficiary
Formation requires five things
1) Settlor who has capacity & owns property
2) Trustee with active duties to perform
3) Ascertainable beneficiaries
a) Within RAP period
4) Trust res (the trust property)
5) Intent to impose
Pros of a trust
1) Confidential
2) Trusts can exist for a long time due to RAP avoidance
3) Avoid probate
Cons of a trust
1) Fees to establish
2) Property has to enter trust and be managed for lifetime of trust
3) Carefully managed and distinct from non-trust property
4) If trust generates income a tax return has to be filed and accounting may be required
5) Trust has annual fees
Resulting Trust
- Salvage doctrine to fix drafting errors
- Resulting trust is used to return property to the original grantor
Constructive Trust
Salvage doctrine to fix drafting errors
- C.T. is used when a person has defrauded another to acquire title the court will impose a C.T to force transfer of property to rightful owner
Dynasty Trusts
- Settlor places a large amount of money into an irrevocable trust and structures trust to pay income for life to successive generations of beneficiaries with principal paid in the discretion of the trustee and a final distribution of the principal to a charity upon death of all relevant beneficiaries
- Avoid estate taxation at every generation
Costs:
1. Needs to be irrevocable with a strict distribution requirement or wholly discretionary
2. Inflexibility
Basic Mandatory Trust or Discretionary Trust
Trust to protect minors
- Provides income for a child until a determined age then the trust will pay out the principal once they reach that age
- Most states do not consider this a RAP violation if the trust terminates during the kid’s lifetime + conditions/terms are reasonably ascertainable
Support Trusts
Trust to protect minors & S.S. spouses
Give trustee discretion to distribute income and/or principal for the support of beneficiaries
Support = food, housing, utilities, tuition, medical expenses
Support in manner they are accustomed to
Trustee could be liable of an abuse of discretion if he pays beneficiary more than reasonably necessary for support
Spendthrift Trusts
Provision in a trust that prevents beneficiary from alienating interest before it becomes possessory
Add language to trust stating any attempt to alienate will result in forfeiture of beneficiarys interest
Disclaimer Trust
- Surviving spouse can disclaim all of a decedent spouse’s estate and it will pass in a disclaimer trust established by the decedent spouse’s will
- Surviving spouse can have access for health, education, maintenance, support + lifetime income interest
- Principal will pass at the survivors death without being considered part of their estate
To create you must establish upon a disclaimer by the surviving spouse:
I. Any property to pass into trust
II. Subject to particular limitations
III. Principal to pass to children or third parties
2 Trusts to create to avoid estate taxes with spouses
1) Credit shelter trust funded with amount equal to federal estate exemption amount
2) Martial deduction trust with remainder of spouses property
- Typically in the form of a QTIP or Powers of Appointment Trust
