How To Create A Trust

Create A Trust!

A trust is created when a settlor with capacity intentionally conveys benefits or assets to beneficiaries during their lifetime and then gives the powers to control the trust to a competent trustee. It’s a key component of estate planning. It’s also important to understand the difference between a revocable trust and an irrevocable trust. A revocable trust allows provisions of a trust to be cancelled or altered if the grantor allows it. The assets stay with the grantor also. In an irrevocable trust a trust can not be terminated or modified. In an irrevocable trust, after the grantor transfers assets into their trust all their right to modify the trust have ended. So in an irrevocable trust the grantor gives up their rights to modify the trust. In a revocable trust the grantor still has the ability to modify or change the trust.

Key definitions:

  • Settlor with capacity: An individual who creates the trust. The individual must be over 18 and be of sound mind.
  • Beneficiaries: Those who will receive money or other assets from the trust.
  • Trustee: Individual or bank chosen by the Settlor to oversee the trust.

Create A Trust: Intent

For a trust to be valid the Settlor must have an intent to create a trust. This can usually be shown through evidence that the settlor owned property, wished to create a trust through some type of precatory language (precise directions, directions of deposition of property), or extrinsic evidence exists showing that the settlor had supported the distribution of property to an intended beneficiary. A Settlor must also select a competent trustee and assign specific duties to the trustee to oversee the trust. These duties can include how and when to distribute money to beneficiaries. If certain monies should be donated, and when and how or to what organization, etc. The Settlor must also include a definite beneficiary and specifically describe property to be included in the trust. In addition, the Trustee cannot be the sole beneficiary. This rule is in place to prevent Settlors from avoiding creditors by putting their property in a protective trust. If a trust Is considered revocable a trustee’s duties are owed exclusively to the settlor where as in a irrevocable trust a trustees duties are owed solely to the beneficiaries of the trust.

Create A Trust: Types of Trust

When it comes to the making of a trust a Settlor must consider what type of trust to create, this is a vital important aspect in estate planning. There are express trusts, testamentary trusts, secret and semi-secret trusts as well as honorary trusts, which are trusts for pets. Its important to talk to an attorney to determine which trust it is that will most appropriately fit your needs.

Express Trusts Types:

An Inter Vivos Trust: Trust created by a person declaring himself a trustee for another or by the transfer of property to another as trustee during the life of the settlor. There must be intent where one declares themselves as the trustee. The benefits of such a trust is that there is a convenient management of assets, plan for the possibility of incapacity, avoid probate costs and delays, permit secrecy as to the beneficiaries and assets and allows the settlor to choose the applicable state law.

Testamentary Trusts:

The intent and essential terms of the trust must be in the will itself, from a writing incorporated by reference into the will or from the exercise of a power of appointment created by the will.

Secret and Semi Secret Trusts

  • Secret Trust-Constructive Trust imposed
    • Will made is absolute on its face, made in reliance on the beneficiary’s promise to hold the property in trust for another, needs to be proven by clear and convincing evidence.
  • Semi-Secret Trust-Resulting Trust implied
    • The will makes a gift in trust but fails to name the beneficiary, so the gift fails and the trustee will hold the property for the beneficiaries.
Secret Trust Semi-secret
Description Absolute gift in will made in reliance on beneficiary’s promise to hold the property in trust for another Gift in will to a person in trust but does not name trust beneficiary
Extrinsic Evidence Allowed Not Allowed
Result Constructive trust imposed in favor of intended beneficiary Trustee holds on resulting trust for testators legatees or heirs

Create A Trust: Defenses/Arguments that a Trust was created

  • Fraud in the inducement
    • Trustee orally promised to serve as trustee but really had not intention of doing so
  • Confidential Relationship
    • Grantee or Trustee served in confidential relationship to grantor-settlor. Rationale here is that equity’s concern that one would take advantage of a confidential relationship to enrich himself outweighs Statue of Frauds. But granter or Trustee must have agreed to hold property in trust.

Create A Trust: Charitable Trusts

Charitable trusts are created when a Settlor wants to donate their assets or property to a charity. For a charitable trust to be valid it must have indefinite beneficiaries and it must be for charitable purposes (religion, medicine, science, governmental, research, education). In addition, charitable trusts unlike other forms of trusts can be perpetual and the cy pres doctrine (allows courts to select alternatives if there is a violation) will be applied. The cy pres doctrine usually applies when there is an unlawful, impracticable, impossible objective, wasteful objective that is involved with a trust. In addition, when a specific charitable purpose indicated by the settlor is no longer possible the courts under the cy pres doctrine can direct that the trust property be applied to another charitable purpose as close as possible to the original one.

Overall it is extremely important that you talk to an attorney regarding which type of trust you wish to create and any other estate planning questions you might have. To assist the attorney it would be beneficial to indicate the purpose of your trust, your intended beneficiaries, whether you want your trust to expire within a certain time limit, and who you would want to be your trustee.

If you want information about making a will check out our article on how to do so here.

Forbes has also written an article about writing a living revocable trust. You can find their article in their estate planning section here.

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