Chapter 8 Trusts: Elements And Purpose

Wills, Trusts, and Estates Administration, 3e Herskowitz 2 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Learning Objectives Understand key trust terminology Understand what a trust is Understand the advantages of using a trust Understand how to create a trust Understand how and why to terminate a trust Understand the various types of inter vivos and testamentary trusts

Wills, Trusts, and Estates Administration, 3e Herskowitz 3 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Trust Terminology Trust: the “thing” Rest/Corpus: the property for the thing Trustor/Settlor: the creator the thing Trustee: the manager of the thing Beneficiary: the recipient of the thing Trust Purpose: the stated objectives of the thing Testamentary Trust: created as part of a will Inter Vivos Trust: created when the trustor is alive

Wills, Trusts, and Estates Administration, 3e Herskowitz 4 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Trustor Must own the property being transferred into the trust Can be a legal entity, such as a corporation The trustor must have testamentary or contractual capacity to create the trust

Wills, Trusts, and Estates Administration, 3e Herskowitz 5 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Trustee Receives legal title to the property (the res) Is a “fiduciary” Can be a legal entity, such as a bank’s trust department Must use prudence in following the trust’s objectives Must protect the principal, above all considerations Can be liable for negligent mismanagement

Wills, Trusts, and Estates Administration, 3e Herskowitz 6 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Trust Property Also called “the res,” “corpus,” “principal,” or “fund” May not include property with restrictions on transferability, such as a government pension Legal title rests with the trustee Equitable title rests with the beneficiaries

Wills, Trusts, and Estates Administration, 3e Herskowitz 7 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Beneficiary Holds the equitable title to the trust property Is entitled to the trust’s income and profits, according to the trust’s plan, but isn’t entitled to control the trust Need not have any particular level of mental capacity Has standing to sue the trustee over the trust’s management

Wills, Trusts, and Estates Administration, 3e Herskowitz 8 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Trust’s Purpose Must be clearly stated in the trust document May not violate the law Example: to provide for the support of the surviving spouse, and then to distribute the principal to the trustor’s children (or grandchildren) following the death of the surviving spouse

Wills, Trusts, and Estates Administration, 3e Herskowitz 9 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Express vs. Implied Trusts Express Trust  written or oral  the written trust is the traditional trust  must have a clear purpose  oral trusts have a real “proof problem” Implied Trust  involuntary  created by operation of law  created to avoid “unjust enrichment”  “resulting” and “constructive” trusts are intended to promote fairness and prevent fraud

Wills, Trusts, and Estates Administration, 3e Herskowitz 10 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Testamentary vs. Inter Vivos Trusts Testamentary Trust trust used in a will has no effect until the will is probated Inter Vivos Trust also called a living trust takes effect upon execution of a declaration of trust

Wills, Trusts, and Estates Administration, 3e Herskowitz 11 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Revocable vs. Irrevocable Living Trusts Revocable Trust  can be changed or terminated by the trustor  is part of the trust’s taxable estate Irrevocable Trust  can’t be changed or terminated by the trustor  can take effect during the life, or at the death, or the trustor

Wills, Trusts, and Estates Administration, 3e Herskowitz 12 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Pourover Will Also called a pourover trust Uses a will to transfer the decedent’s property to an executed trust

Wills, Trusts, and Estates Administration, 3e Herskowitz 13 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. When To Terminate A Trust 1. Its purpose has been fulfilled Example: the surviving spouse has died 2. Its term has concluded Example: a ten-year income distribution trust 3. It has been terminated by the trustor Example: a revocable living trust 4. Its legal and equitable title merge in the same person Example: trustee becomes the sole beneficiary after the co-beneficiary dies 5. Its beneficiaries consent to its termination Example: the beneficiary of a college-fund trust wins the lottery and wants to refuse further distributions

Wills, Trusts, and Estates Administration, 3e Herskowitz 14 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Key Elements Of A Trust Agreement 1. The trust’s name 2. The trust’s purpose 3. The trustee’s appointment 4. The trustee’s powers 5. The trust’s beneficiaries 6. The trust’s property 7. The trust’s method of distribution 8. The trust’s remainderman 9. The trust’s termination 10. The trust’s necessary signatures

Wills, Trusts, and Estates Administration, 3e Herskowitz 15 © 2011, 2007, 2001 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Paralegal’s Role With Trusts Interviewing the trustor regarding the future trust’s assets, purpose, trustee, and beneficiaries Researching the law related to the trust’s purpose Drafting the trust Proofreading the trust for internal consistency