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At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor or Maker, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. Trusts have evolved to the point where there is a specialized trust to help further almost any estate planning goal; however, all trusts require the same five elements for creation, including:
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- The person who creates the trust. A Settlor may also be referred to as the Grantor, Trustor, or Maker.
- An individual or entity that administers the trust terms as well as manages and invests the trust assets.
- A beneficiary is a person, entity, charity, or even family pet that receives the benefit of the trust assets. A trust may have both current and future beneficiaries.
- The terms are created by the Settlor and may be anything that is not illegal, impossible, or unconscionable.
- A trust must be funded. Almost anything of value can be used to fund a trust, including cash, securities, and real property.
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All trusts can be broadly divided into two categories – testamentary and living trusts. A testamentary trust is one that does not become active until the death of the Settlor, and which is typically triggered by a provision in the Settlor’s Last Will and Testament. A living trust, also referred to as an “inter vivos” trust, activates when all formalities of creation are complete, and the trust is funded.
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Trusts can be further divided into revocable and irrevocable trusts. A revocable trust can be revoked or terminated by the Settlor at any time and for any reason whereas an irrevocable trust cannot be revoked or terminated by the Settlor for any reason.
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A trust agreement is the name of the document used to create a trust. Within the trust agreement are the terms, created by the Settlor, that dictate how the trust will operate. Trust administration refers to the Trustee’s job of overseeing the terms of the trust in action. Generally, the more complex and/or valuable the trust assets are, the more complex and difficult it is to administer a trust.
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The Settlor of the trust may appoint anyone to be the Trustee of the trust. This often leads to one of the most common trust mistakes, appointing the wrong person as Trustee. A Settlor frequently appoints someone close to him or her, such as a spouse, close friend, or family member, without taking the time to evaluate the individual’s suitability as a Trustee. People often think that appointing someone they trust to be the Trustee of their trust is all that is needed. While the Trustee certainly should be trustworthy, there is more to the job of the Trustee. Ideally, the individual should have a legal background as well as some experience in finance given the types of duties the Trustee will have when administering the trust. For larger, more complex, trusts, a professional Trustee is often the best choice
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Administering a trust typically involves a wide range of duties and responsibilities that require legal and/or financial experience, skills, and knowledge. Examples of some common duties and responsibilities of a Trustee include:
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- Understanding and abiding by all trust terms unless they are illegal, impossible to fulfill, or unconscionable.
- Understanding and furthering the trust purpose as stated by the Settlor.
- Communicating with beneficiaries.
- Mediating conflicts among beneficiaries.
- Investing trust assets using the “prudent investor” standard.
- Managing trust assets.
- Defending the trust during litigation
- Distributing trust assets according to the trust terms.
- Making discretionary decisions, if applicable.
- Keeping trust records.
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The Trustee is responsible for administering the trust until he/she resigns, is removed, or until the trust terminates. The way a trust terminates depends, in part, on the type of trust. The Settlor of a revocable trust may terminate the trust at any time without providing a reason for the termination. If the trust is an irrevocable living trust, the Settlor cannot terminate the trust. In that case, the trust terms may grant the power to terminate the trust to the beneficiaries, to the Trustee, or to a specific person – or to a combination of people. The trust itself may also include a term that sets a date when the trust will terminate or that sets forth an event that must occur to trigger the termination of the trust, such as a child reaching the age of majority. Finally, anyone involved in the trust may turn to a court to terminate the trust. A judge may order the termination of a trust for reasons such as the trust purpose has been achieved, the trust has insufficient assets left to warrant continuation or everyone involved agrees that termination is in their best interest.
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Contact Us
The North Carolina estate planning attorneys at Clarity Legal Group are dedicated to helping you with all your estate planning needs, both now and in the future. Contact the team today by calling 919-484-0012 or contact us online.
