Tuesday, May 31, 2011

What is a Trust?

Trusts are a common estate planning device, but many people (including a few lawyers!) don't completely understand what one is.  We’ll start the discussion with a definition of a trust that I've used in several CLE presentations I've given:
A trust is a relationship created by a grantor who transfers legal title to property (known as the trust corpus or trust principal) to a trustee, who holds it as a fiduciary for the benefit of one or more beneficiaries.   The beneficiaries’ rights of enjoyment are set forth in the terms of the trust, which are usually contained in a governing document (which may be called a “Declaration of Trust” or “Trust Agreement” or a “Declaration and Agreement of Trust” or sometimes just a “Trust.”)
There are several important concepts contained in that definition: 
  • A trust is a fiduciary relationship between the trustee and the beneficiaries, not a separate legal entity (person) like a corporation or LLC. 
  • Since the trust is a relationship and not an entity, legal title to the trust corpus is held by the trustee.  While we often casually speak about "the trust" doing something (conveying property, making a distribution, or so on) as if it were an entity, it's actually the trustee who is the actor.
  • Since the trustee is a fiduciary for the beneficiaries, it naturally follows that beneficiaries are the persons with standing to enforce the terms of the trust—that is, they’re the ones who sue the trustee when the trustee fails to follow the terms of the trust.
The terms of a trust do not need to be written down in order for there to be a valid trust,  but they usually will be found in a governing document.  At the minimum, a trust’s governing document should do all of the following:
  • Clearly identify the parties to the trust: the grantor, trustee, beneficiaries, and any trust advisors.
  • Indicate if the trust is revocable or irrevocable, and identify who may hold powers to amend the terms of the trust (reserved powers to amend; powers of appointment).
  • Clearly set forth the dispositive (enjoyment) terms of the trust (including those circumstances where the distribution is subject to review or approval by a trust advisor or other outside party) so that the trust accomplishes the grantor’s objectives.
  • Provide a mechanism for succession in the office of trustee.
  • Confer powers on the trustee to permit him to efficiently manage the trust. While the dispositive provisions of every trust--who gets what, when--will be unique, basic trustee powers and other “administrivia” will not vary much from document to document.  (The Ohio Trust Code has a nearly-comprehensive set of statutory trustee powers which drafters may incorporate by reference, and most of us who practice in this area have standard language we use for nearly every trust document. Some trust companies have their own standard trustee power language which they will require in the document as a condition of accepting the trust.)
  • Do all of these things with sufficient clarity that both the trustee and the beneficiary can understand what the trustee is supposed to do and who receives what without having to ask a judge to construe or interpret the document.

No comments:

Post a Comment