Trust (Law) USA

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This page deals with the law of trusts in the USA. For discussion of other jurisdictions, see Trust (Law) non-USA.

In common law legal systems, a trust is a contractual relationship in which a person or entity (the trustee) has legal title to certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control for the benefit of one or more individuals or organization (the beneficiary), who retain beneficial title, according to the terms of the trust and local law. This dual title is frequently called "split title." Most trust law in the United States is now statutory at the state level. Fiduciary tax law is both federal (see the Internal Revenue Code) and state.

Trustees may be competent individuals and/or state or federally chartered corporate, i.e. professional, trustees, typically that have integrated their trust company into their investment management or private banking groups. It is not unusual for an individual to serve as trustee alongside a bank trustee: they are typically called "co-trustees." Both individual and corporate trustees may charge fees for their services, although individual trustees may serve gratis when part of the settlor's family or the settlor him/herself.

Ever fewer American banks serve as trustee, as litigation costs rise. For most banks trust services are not profitable. For large and effective trust organizations a trust organization properly integrated into private banking and investment division can be quite profitable.

The fifty states harbor rich differences in fiduciary law despite on-going efforts to reduce disparities through the Uniform Principal and Income Act and other "uniform code" efforts. Nevertheless, unless the terms of the trust document are incompatible with public policy (creating a trust to advance a criminal enterprise, for example), a trust document will trump local law. For example, some states require all trustee fees to be charged equally to principal cash and income cash. If the trust document directs otherwise, document language will prevail. Where a document contains obnoxious, unworkable, impractical, or outdated language, the beneficiaries and trustees have recourse to local probate courts: most commonly for judicial construction or to deal with circumstances not imaginable by the settlor at the time the trust was created.

The entity (one or more individuals, a partnership, or a corporation) that creates the trust is called variously the settor, grantor, donor, or creator. Practitioners typically distinguish personal trusts from institutional trusts: the former being established as a part of one or more individuals' estate and personal financial planning and/or investment needs, and the latter typically by or on behalf of foundations, endowments, and defined benefit and other qualifed pension plans. Most fiduciaries manage these two types of business separately, although it is not uncommon for small institutional accounts to be handled by the personal trust group.

Typically a trust is created by (1) written instrument (the trust document) signed by both the settlor (who may be the only beneficiary) and the trustee or (2)the last will and testament of the settlor. While there are other ways to create a trust, they are atypical and of little practical interest to trust practitioners: true desert islands cases for the most part. While practitioners (bank trustees and fellow traveler trust and estate attorneys) persist in titling trustd as "Tr. u/a" (trusts under agreement a/k/a inter vivos trusts) or "Tr. u/w" (trusts under will), there is little practical difference between the two: it matters little whether a trust was created while the settlor is alive or following his death per terms of his will.

Industry convention is for the settlor's name to appear in the title after shorthand naming the type of instrument. Consider "Tr. u/a John Smith" ("Tr. u/a" stands for "trustee under agreement"). This title indicates that during his lifetime John Smith created a trust. This title conveys no information about revocability and might better be titled "Tr. u/a John Smith Revocable" or "Tr. u/a John Smith Irrevocable".

Conventional titles may further indicate the names of one or more beneficiaries in cases where the beneficiary is not the same as the settlor. Hence: "Tr. u/a John Smith FBO Alma Smith" or, if appropriate, "Tr. u/a John Smith FBO Alma Smith irrevocable". Titles also frequently include more information such as the existence of more than one trustee ("Co-tr. u/a John Smith": "co-tr" means co-trustee) or that one or more of the trustees are not the original trustee (Successor Co-Tr. u/a John Smith).

As a practical matter the typical corporate trustee's computer system will have room for a short title (with a limited number of characters: 32 in this writer's experience)and a long title with an unlimited character field. Typically, compromises are made in the short title and serve primarily as a reminder the trust advisor which account he/she is viewing on the computer screen. Thus a complicated situation might be resolved as follows:

SHORT TITLE: John Smith IRREV for Alma

LONG TITLE: Successor Co-trustee under the will of John Q. Smith for the benefit of Alma Smith et alia irrevocable dated 5/1/1982 restated 4/11/2003.

In this example the bank trustee is the successor trustee, i.e. not the original, John Q. Smith is the settlor, Alma Smith and others are the beneficiaries, the original document was written 5/1/1982 and that document was completely rewritten, i.e. a new document was substituted for the original. Since each trust document is potentially different from every other, no seasoned and capable practitioner will every assume much at all from the title and will carefully consult actual document language before making any important decisions. And to make matters worse some settlors insist on names that defy industry convention. Thus, aggrieved parents who create a schorship trust for a deceased daughter may put the following language in their document: This trust shall be called the Sally Sue Smith Education Trust. Most bank trustees would likely ignore this and name the trust the John & Jill Education trust.

In general, a trust is not established until the document is (1) signed AND (2) money or something of value is transferred from the settlor to the trustee. Thus, the signing of trust documents does not in itself create a trust. The trust is only truly established when money or something of value, i.e. farm land or a home, for example, is transferred to the trustee. This situation gives rise then to "one-dollar trusts" -- trusts held on the books of bank trust organizations holding one dollar awaiting funding at a later date by life insurance proceeds or the settlor's decision to fund the trust during his lifetime. The bank normally will charge nothing to hold the document and the one dollar until the trust is funding with more than the de minimus amount required to establish the trust. These one-dollar or "life insurance trusts" must be distinguised from irrevocable life insurance trusts with Crummey powers, which are a different kettle of fish altogether.

Most trusts specifically allow for additional asset transfers at the direction of the settlor or others provided the trustee is willing to accept those assets. This can be problemmatical in the case of real estate, where mere entry into the chain of title makes the trustee liable for the acts of all others in the change of title. Corporate trustees will often not accept certain real assets -- particularly where the real property is compromised by unremediated environmental issues or where the trustee is unable to make a thorough inspection. Corporate trustee without real property expertize will typically avoid taking any real assets.

The various names listed above for individual or corporate entity that establishes a trust are interchangeable -- with "settlor" preferred by the legal community and "grantor" by trust officers and related practitioners. Typically, a trust created by a single individual, in which the settlor retains the ability to remove funds at any time, is called a grantor trust. Such trusts are often created mostly as an investment management vehicle -- at least during the life of the settlor. The term "grantor trust" also has a special meaning in fiduciary tax law: a trust in which the tax consequences of the trust's investment activities are entirely the responsibility of the settlor or another individual who has unfettered power to take out all the assets. Therefore anyone hearing the expression "grantor trust" is advised to inquire whether the context is tax or not.

There are three types of trust for fiduciary tax purposes: grantor trusts whose tax consequences flow directly to the settlor's 1040 and state return, simple trusts in which all the income created must be distributed to one of more beneficiaries and is therefore taxed to the non-settlor beneficiary (e.g. the widow of a trust created by the late husband), whether or not the income is actually distributed (it happens), and complex trusts, which are all trusts that aren't grantor trusts or simple trusts. Some trusts may alternate between simple and complex under certain conditions. Many but not all trust organizations do their own tax work. This can be highly specialized work.

All simple and complex trusts are irrevocable and in both cases any capital gains realized in the portfolios are taxed to the trust corpus or principal. Practitioners commonly distinguish between inter vivos and testamentary trusts. These terms refer only to the status (living or dead) of the settlor. Thus a settlor who is living at the time the trust is established creates a contract between living persons, i.e. an inter vivos trust. A trust created in an individuals' will is called a testamentary trust and is thus created following the settlor's death. Practitioners and the public alike frequently erroneously assume all inter vivors trusts are revocable and all testamentary trusts are not. It is not at all infrequent to see irrevocable inter vivos trusts and testamentary trusts that can be revoked.

The trustee is said to hold legal title to the corpus, while the beneficiary holds equitable or beneficial title. If the legal and equitable title merge in the same person, the trust is considered nonexistent. This can happen when the trustee becomes the sole beneficiary.

In general

The trustee can be either a natural or a legal entity. There can be multiple trustees, in which case the trust should provide a mechanism for the trustees to make decisions. A trust will not fail solely for want of a trustee; if there is no trustee, whoever has title to the trust property will be considered the trustee. If the interests of the trust require it, a court of competent jurisdiction may appoint a trustee to ensure the continuing viability of the trust.

The trust property can be any form of property, be it real or personal, tangible or intangible. The beneficiary can be a single person, multiple persons, or a defined class or group of persons, including people not yet born at the time of the trust's creation. The trustee can be one of the beneficiaries, so long as the trustee is not the only beneficiary. A trust can also be created with some charitable purpose, as opposed to having a particular person or persons as its beneficiary.

The trust has been called the most innovative contribution of English legal thinking to the law. It plays an important role in all common law legal systems. Trusts developed out of the English law of equity which has no direct equivalent in civil law jurisdictions. However, since the use of the trust is so widespread, some civil law jurisdictions have incorporated trusts into their civil codes. Civil law systems also have analogous concepts like patrimony of affectation and the foundation that have similar independent patrimonies from their donors that trusts can have from their grantor.

Trusts are used for a number of purposes, including to plan one's estate and as a form of investment. They are also frequently used to reduce the amount of tax payable, since they often receive special tax treatment. Pension schemes are often set up as trusts.

Express, implied, and constructive trusts

Trusts can be classified in a number of ways. One of these ways is by how the trust was created. Most commonly, a classification of trusts as express trusts, implied trusts (resulting trust) and constructive trusts is used. Note however that this terminology is not accepted by all authors.

An express trust is created where one person (the settlor) conveys property to another (the trustee) on the condition that the property will be used for the benefit of a third party or parties (the beneficiaries). The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate.

An implied trust (also called a resulting trust) is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist.

Unlike an express or implied trust, a constructive trust is not created by an agreement between a settlor and the trustee; rather a constructive trust is imposed on the trustee by the law. This generally arises due to some wrongdoing on behalf of the trustee, where the trustee has acquired legal title to some property but cannot in good conscience be allowed to benefit from it. For example, the Privy Council has held that if a fiduciary accepts bribes or makes an improper profit, a constructive trust is thereby created, by which the fiduciary holds the bribes or improper profit as trustee of a constructive trust for the benefit of the principal.

Simple or bare trusts versus special trusts

In a simple trust (also called a bare trust) the trustee has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust. In a special trust, however, the trustee has active duties beyond this.

Private trusts versus public or charitable trusts

A private trust has one or more particular individuals as its beneficiary. By contrast, a public trust (also called a charitable trust) has some charitable end as its beneficiary. In order to qualify as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable trust, by analogy. Charitable trusts are entitled to special treatment under the law of trusts and also the law of taxation.

Fixed, discretionary and hybrid trusts

In a fixed trust, the amount of money or other goods or services to be paid to the beneficiaries is fixed by the settlor. An express fixed trust requires a certain degree of certainty regarding who are the beneficiaries and the amounts to be paid to them, so that the trustee has little or no discretion. If this degree of certainty is not met, an implied trust exists instead. In a discretionary trust, the amount of money or other goods or services to be paid to the beneficiaries is up to the trustee, so long as the decision is made based on the beneficiaries best interests. A hybrid trust combines elements of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries.

Specific types of trust: unit trusts, protective trusts

A unit trust is a trust where the beneficiaries (called unitholders) each possess a certain share (called a unitholding) and can direct the trustee to pay money to them out of the trust property according to the number of unitholdings they possess. Unit trusts are primarily used for investment purposes.

A protective trust is a type of trust that was devised for use in estate planning. Often a person, A, wishes to leave property to another person B. A however fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it. A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B. The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remainders, and are frequently used as alternatives to them.

See also

• Trusts and estates
• Charitable trust
• Foundation (charity)
• Trust (disambiguation)
• Blind trust

External links

• Basic info from the legal perspective of New Zealandde:Treuhand