Setting Up a Trust

A trust is a designated fund created to help a person organize their wealth and spending needs. The creator of the trust is called the “grantor,” and they devise all of the rules for the trust according to specific legal guidelines. These guidelines may vary from state to state.

Trust creation generally begins with the grantor deciding that they want to place specific assets in a trust, for the benefit of another person who is referred to as the beneficiary. A third person, called the trustee, is designated to manage the trust. This can be the same person as the grantor; however, it is more commonly someone else.

Wealth is moved from the grantor’s possession into the trust in the form of gifts. These financial amounts are invested based on the rules of the trust that were established by the grantor. Some examples of such rules for how the beneficiaries can access the trust include:

• At what age;
• How often; and
• How much money they can withdraw at one time.

What Are The Different Kinds Of Trusts?

There are various types of trusts, including revocable trusts and irrevocable trusts. Revocable trusts can be altered or even revoked by the grantor after their creation, while irrevocable trusts cannot be altered once they are created.

An express trust is an intentionally and deliberately created trust. The trust creator distributes property or funds to the trustee, who then holds the property in trust subject to the rights of the beneficiaries. Furthermore, the law recognizes two types of express trusts: a lifetime or inter vivos trust, and a testamentary trust. A lifetime trust is set up during the lifetime of the settlor, while a testamentary trust precedes the settlor’s death.

The choice of trust type largely depends on several factors, including the needs and desires of the grantor as well as the basic purpose for the transfer. Some of the most common types of trusts include:

• Bypass Trusts: A bypass trust may also be referred to as a family trust, or marital trust. It is generally intended to help married couples most efficiently manage the expense of estate tax;
• Special Needs Trusts: Special needs trusts serve disabled people, who are not able to earn their own living because of their disabilities and/or illnesses;
• Spendthrift Trusts: Spendthrift trusts are created for the purpose of controlling how the beneficiary uses the funds, such as when the trust creator predicts that the beneficiary will not be able to manage the funds themselves; and/or
• Life Insurance Trusts: These trusts help beneficiaries avoid the estate taxes, as well as other costs that a life insurance policy would generally require.

Other types of trusts to consider include:

• Charitable Trust: These are created to fundraise for a specific charity, or for the public good;
• Custodial Trust: A revocable trust that benefits a beneficiary who is incapacitated or disabled;
• Discretionary Trust: This trust delegates discretion to the trustee, to decide when and how to distribute trust assets to the beneficiary or beneficiaries. Discretionary trusts generally do not set up fixed distributions; rather, they provide general guidelines for the trustee;
• Dynasty Trust: A trust that skips generations at named intervals, intended to minimize taxation of large amounts of family wealth as it is passed to following generations; and/or
• Land Trust: Land-ownership arrangements in which the trustee holds title to the land. The beneficiary is given the power to direct the trustee, and to manage the property and draw an income from the trust.

As such, one of the first and most important steps when creating a trust is to select which type of trust is needed to best suit your needs.

What Is Required To Create A Valid Trust?

To reiterate, the specific requirements for creating a valid trust vary from state to state, and are based on the specific type of trust. However, general requirements that must be satisfied for a trust include:

1. Settlor: There must be a settlor, who can generally be any individual, although some states may impose an age requirement. Some states require that a settlor be 18 or older. Additionally, most states require that a settlor have the mental capacity to form a contract;
2. Delivery: The settlor must deliver legal title to the property. What this means is that the trust property must be formally transferred to the trustee in order for delivery to be valid. This also means that the trustee must take legal title to the assets;
3. Property: The property must be delivered to a trustee, and the trust property can be either real property or personal property. The only restriction regarding the type of property that can be held in trust is that the settlor must actually own the property at the time of trust creation. Additionally, the property must be identified at the time of creation, and the settlor must have the right to transfer the property into the trust;
4. Trustee: The trustee must hold legal title to the property. In order for a trust to be valid, the trust must have a named trustee. Generally speaking, for an inter vivos trust, almost anyone can serve as trustee. However, a testamentary trust that is created under court supervision may be subject to state-imposed requirements regarding who can be a trustee. Certain people may be prohibited from serving as a trustee, such as certain convicted felons and minors. While a testamentary trust must always have a trustee, failing to name one in the trust document itself could result in the court appointing one as necessary;
5. Beneficiaries: A trust must have one or more beneficiaries, all of whom must be definite and identifiable. What this means is that the names of the beneficiaries cannot be open to speculation. An example of this would be how a trust that instructs a trustee to pay trust income for life to “all my good friends,” has not named definite, ascertainable individuals;
6. Intent: The settlor must intend to create an enforceable obligation; meaning, there must be present intent to create a trust by use of definite words, or specific conduct. This intent must be present at the time that the settlor actually owns the property that is to be put into the trust. When intent is uncertain, courts will closely examine and consider all of the surrounding facts and circumstances in order to determine if intent was present;
7. Lawful Purpose: A trust must be created for a valid or lawful purpose. An example of this would be how the trust cannot require the commission of a crime as a precondition to a beneficiary receiving funds. Additionally, a trust cannot be created in order to hide and shield funds from creditors. And, a trust may not be against public policy, meaning conditions that restrict marriage or promote divorce. An example of this may be how a testamentary trust clause dictates to a trustee that a certain beneficiary is not to receive trust assets unless and until that beneficiary divorces their spouse; and
8. Valid Execution: A trust document must be validly executed; meaning, for trusts that transfer real property, the trust must both be in writing and signed by the settlor. It is important to note that some states require that trusts that are only transferring personal property be in writing, while other states do not impose this requirement.

Do I Need An Attorney For Setting Up A Trust?

If you wish to set up a trust, it is advised that you consult with an experienced and local trust attorney. A local lawyer can help you create a trust according to your state’s specific laws regarding the matter. An attorney will also be able to represent you in court, as needed, should any issues arise.