A trust is a legal device which allows the owner of property to make transfers of that property. This legal device also allows them to have the property managed on behalf of someone else. The property is referred to as trust assets, and the other party is referred to as the trustee.
Laws which govern trusts and their terms can vary from state to state. Generally speaking, trusts are an efficient way for people to transfer their assets in a way that they can control and manage. An example of this would be how they may place specific conditions on the trust property. These conditions must be fulfilled before the property is transferred to its intended recipient.
There are many different types of trusts, each serving a different purpose. One of the most common types of trust is an express trust. An express trust is an intentionally, deliberately created trust. In an express trust, the trust creator distributes property or funds to a trustee, who then holds the property “in trust.” This means, the trustee holds legal title to the trust. The trustee does so subject to the rights of individuals, known as beneficiaries, who are the individuals entitled to the trust property.
Wills, trusts, and estates law recognizes two types of express trusts. The first is known as a lifetime or inter vivos trust, and the second is known as a testamentary trust. A lifetime trust is established during the lifetime of the person who created the trust, who is known as the settlor. A testamentary trust comes into being upon the death of the settlor, and is generally enacted by instructions that are contained in an individual’s will documents.
Generally speaking, the following requirements must be satisfied for a trust to be considered valid. This applies whether the trust is inter vivos or testamentary:
- There must be a settlor, or creator;
- The settlor must deliver legal title to the property that they are distributing;
- The property, which can be referred to as res, corpus, or trust principal, must be delivered to a trustee;
- The trustee must hold legal title to the property;
- The legal title must be held for the benefit of one or more trust beneficiaries;
- There must be intent to create a trust;
- The intent to create a trust must be for a lawful purpose, and not for any illegal reason; and
- The document that embodies the trust must be validly executed.
What Is A Small Trust?
To reiterate, the person in charge of the property is referred to as a trustee, while the people who receive the benefit are referred to as beneficiaries. And, the original owner of the property is referred to as a settlor, or trustor.
In order to create a trust, the settlor or trustor must draft a trust document that expressly places the property in the care of the trustee. The trust must also expressly name the beneficiaries, as well as the terms of the agreement. An example of property that is most commonly the subject of a trust would be real estate, cash, and stocks.
Additionally, trusts may have conditions placed on them. An example of this would be how a settlor may create a trust for their children, but stipulate that they cannot receive money from the trust until they reach a certain age. Another example of such a condition would be to complete a specified life event, such as earning a college degree.
It is important to consider that economic difficulties can have an adverse effect on a trust. An example of the negative effect that economic difficulties can have on a trust would be that it may become a small trust.
A trust is referred to as a “small trust” when the property that is held in the trust decreases in value. An example of this would be how a stock that is the subject of a trust can decrease in value when the stock market dips or experiences fluctuations.
What Are The Effects Of A Small Trust?
When a trust becomes a small trust due to a decrease in the property’s value, or when the trust pays out more money than it is taking in, there may be considerably serious results. Some of the most common examples of the effects of a small trust include:
- Less money is available in order to pay debts that are incurred by the trust;
- Smaller payouts are made to the trust’s beneficiaries;
- Less money is available to pay fees to the bank, when using a corporate trustee; and
- Less money is available to pay the trustee as their compensation for maintaining the trust.
Simply put, all of these effects are undesirable and do not fulfill the trust’s intended purposes. Because of this, the settlor and trustee should closely monitor their trust in order to determine if the property still holds the same value, especially when there is an indication that the value could decrease.
Can You Terminate Or Modify A Trust?
If the property that is in a trust has dramatically decreased in value, or if the funds have been exhausted, your best option may be to terminate the trust. Generally speaking, a settlor is the party who will need to terminate the trust. However, most states have small trust statutes, which are laws that permit the trustee or beneficiaries to terminate or modify a small trust under specific circumstances.
Essentially, terminating a trust completely ends the trust. In order to carry out the termination, the trustee will distribute the remaining property in the trust to the beneficiaries. It is important to note that the trust agreement will generally contain information regarding how to distribute such property, if the parties that are involved choose to terminate the trust.
Alternatively, modifying a trust allows for the parties to alter the terms of the trust. Modification is especially ideal when changes to the trust will allow it to continue operating, and provide the intended benefits to the trust’s beneficiaries. An example of this would be allowing the settlor to place more assets into the trust.
Small trust statutes allowing for termination or modification can vary, largely depending on your jurisdiction. However, most statutes will give you the option to either modify or terminate your small trust, as opposed to only providing one choice. Generally speaking, the fact that property in the trust has decreased in value will be grounds for termination or modification of the trust.
Some notable variances between the state statutes include:
- The ability to terminate or modify a trust without first receiving court approval;
- The ability to terminate or modify the trust, but only after receiving court approval or beneficiary approval; or
- The ability to terminate or modify a trust, but only after it decreases to a certain amount, which is outlined in the statute.
Whether you should modify or terminate your small trust largely depends on your specific circumstances. An example of this would be how if a trustee can reallocate funds paid to beneficiaries, where all would still be making a profit or receiving the intended benefit, modification would be a more ideal option when compared to terminating the small trust.
Do I Need An Attorney For Small Trust Issues?
If you are experiencing issues associated with a small trust, you will need to consult with an experienced and local trust lawyer. An area attorney will be best suited to help you understand your legal rights and options according to your state’s specific trust laws. An attorney will also be able to represent you in court as needed.
