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A Trust is an arrangement that allows a property, real, tangible and intangible, is managed by one person, or persons, or organizations, for the benefit of another. A trust is created by a settlor, who entrusts some or all of his or her property to people of his choice called the trustees.
The trustees hold legal title to the trust property and they are compelled to hold the property for the benefit of one or more individuals, usually specified by the settlor, who hold equitable title. The trustees owe a fiduciary duty to the beneficiaries, who are the “beneficial” owners of the trust property. The trust is governed by the terms of the trust document, which is usually written. The trust is usually governed by local law.
Property of any form and kind can be held on trust. The uses of trusts are many and varied. Trusts can be created during a person’s life, by a trust instrument, or after death in a will.
WHAT FORMALITIES ARE INVOLVED TO CREATE A TRUST?
Trusts require some certainties to be formed:
1. Intention: There must be a clear intention by the settlor to create a trust.
2. Trust res or Subject Matter: There must be a identifiable property specifically to create the trust with. “The majority of my estate” or “three third of my bonds” are not ascertainable. Any specific property , real or personal, tangible or intangible, however, will do for the trust purposes.
3. Beneficiaries or Objects: The beneficiaries of the trust must be clearl y identified, or at least be ascertainable, like all my grandchildren. This will include all the grandchildren even if they are not born yet. In a discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries.
4. Trustee: A trust must have a trustee and if not, the court will designate a trustee.
5. Purpose of the trust: There must be a definite purpose for the creation of the trust.
WHO IS A TRUSTEE AND WHAT RESPONSIBILITIES DOES THE TRUSTEE HAVE?
A trustee is either a person or a legal entity such as a company. A trust may have several trustees. A trustee has many responsibilities and they vary from trust to trust depending on the type of the trust. If there is no trustee, whoever has title to the trust property will be considered the trustee. Otherwise, a court may appoint a trustee. Trustees are nearly always appointed in the trust document, also called Trust Instrument, which creates the trust.
It is very important to remember a trustee has fiduciary duty and responsibility to the trust and to the beneficiaries. A trustee may be held personally liable for any issues which arise with the trust which was caused by his/her oversight. For example, if a trustee doesn’t properly invest trust monies in order to fully expand the trust fund, he may be liable for the difference. However, professional trustees maybe held to a higher standard than non-professional trustees.
The trustees are the legal owners of the trust’s property. The trustees administer all of the trust affairs. This includes investing the assets of the trust; make sure trust property is preserved and is productive; do the accounting for and reporting periodically to the beneficiaries concerning all transactions associated with trust property; filing any required tax returns on behalf of the trust and all other administrative duties.
Sometimes the trustees must make decisions as to whether beneficiaries should receive any income and how much and how often. The circumstances in which this discretionary authority is exercised by trustees is usually provided for under the terms of the trust instrument. It is then the trustees’ duty to determine in the specific instance of a beneficiary request whether to provide any funds and in what manner.
By default, being a trustee is an unpaid job. However, in modern times trustees are often lawyers or other professionals who cannot afford to work for free. Therefore, often a trust document will state specifically that trustees are entitled to reasonable payment for their work.
WHO ARE THE BENEFICIARIES?
The beneficiaries are beneficial or equitable owners of the trust property. Either immediately or eventually, they will receive income from the trust property or they will receive the property called the Trust Corpus itself. The extent of a beneficiary’s interest depends on the wording of the trust document. One beneficiary may be entitled to income, whereas another may be entitled to the entirety of the trust property when he turns a certain age like 30, or he gets married or has his first child. The settlor has all the discretion when creating a trust, subject to limitations imposed by law.
AFTER YOU CREATE A LIVING TRUST, DO YOU STILL NEED A WILL?
Absolutely. Even if you think you have transferred all of your property to a living trust or have it arranged in some other way to avoid probate, you still will need a Will. This is because there is no way of knowing exactly what you will own and how it will be held at the time of your death. If, for example, after you draw your trust, your grandparents leave you their estate, that estate will not be included in your trust automatically. Unless you officially transfer these assets into your trust, they will be included in your probate estate and inheritance. These newly acquired assets may be a reason for your estate to go to probate.
Another example would be the accident that may have caused your death. A settlement agreement’s proceeds to pay your surviving family will have to pass through the probate if they are not anticipated or are not mentioned in your Will.
Therefore, even when it is virtually certain that there will be no probate, we still recommend that you to have a will and exercise all of your options in accordance with your wishes and your estate distribution. This will ensure that any loose ends that may arise after your death are covered and coordinated with your estate planning.