In a previous post, I discussed the basics of trusts. In this post, I will continue that discussion by covering the process of creating a trust.
Parties to a Trust
Creating a trust requires a few necessary parties to the process. Sometimes one individual can fulfill the roles of all the parties, so long as at least one other person also stands to benefit from the trust.
The settlor is the creator of the trust. The settlor contributes the property to the trust and provides instructions for the operation of the trust and the distribution of the trust property.
The trustee manages the trust. The trustee’s management powers include the power to invest the trust property, the power to administer the trust, and the power to distribute trust property to beneficiaries as outlined in the trust documents.
As I discussed in greater detail in a previous post, the trustee owes fiduciary duties to both the settlor and the beneficiary. These fiduciary duties include, among others, the duty of loyalty—the duty to act only in the best interest of the beneficiary and in accordance with the expressed intent of the settlor— and the duty of prudence—the duty to act in accordance with an objective standard of care.
The trust beneficiaries are those for whose benefit the trust has been established. They have the right to the property acquired from the trust proceeds. In addition, they are protected from the creditors of the trustees, meaning that the trustee’s personal creditors cannot raid the trust to satisfy the trustee’s debts.
Requirements for Creating a Trust
Intent to Create a Trust
First, the settlor must intend to create a trust. The intent is sufficient; creating a trust does not require the use of any formal, legal words. The settlor may create a trust if he intends for property to be held by one person for the benefit of another, even if the settlor is not familiar with the legal concept of a trust.
Transfer of Property
There must also be a transfer of property to the trustee. Delivery of the property may be the actual delivery of the trust property, constructive delivery of the property—that is, the provision of a means to gain possession of the property, such as delivering the key to a safety deposit box—or symbolic delivery of the property—such as delivery of a deed.
Property must actually be delivered for a trust to exist. The expectation of future delivery of property is generally not sufficient to create a trust, except in cases of testamentary trusts and trusts created to receive life insurance proceeds.
As discussed above, a trust cannot exist without clearly identifiable beneficiaries for whose benefit the property is being held in trust. The beneficiaries must be clearly identifiable but do not have to exist at the time of the trust’s creation, such as in the case of trusts created for future children.
There must generally be a written instrument for a trust to exist where the property to be held in trust is real property, that is, real estate. (Since a testamentary trust springs from a valid will, it obviously requires a writing as well.)
A writing, however, is not required where personal property is to be held in trust, so long as there is clear and convincing evidence that the settlor stated the property was to be held in trust.
A constructive trust is a trust created by a court, usually to right a wrongful transfer of property. In very rare, extraordinary circumstances, a court may impose a constructive trust for real property, even without a writing.
If two of the following three elements are present—or if one is egregiously present—a court may determine there to be a trust:
- Fraud or duress.
- A confidential relationship between the property’s original owner and the transferee.
- A statement suggesting the creation of a trust made in anticipation of death.
Constructive trusts are, however, difficult to establish, and oral trusts are difficult to enforce. Therefore, a trust document should always be used, and a trust should normally be formed with the assistance of competent legal counsel.