A trust is a right in property held by one person for the benefit of another. Trusts serve a variety of purposes and may take a number of different forms. A trust may be created to benefit a family member, a charity, or even a pet. Because trusts allow an individual to distribute their assets to others while minimizing estate, income and gift taxes, trusts have become an essential component of estate planning. In the absence of nationally uniform trust legislation, individual states have developed their own laws to govern the establishment and maintenance of trusts. The Uniform Probate Code (UPC), which sets forth provisions relating to both wills and trusts, has been adopted in whole by over thirty percent of the states.
Creation of an Express Trust
Express trusts are created by a settlor, who transfers property to a trustee for a valid trust purpose. The trustee then distributes the trust property to a beneficiary pursuant to the terms of the trust. The following definitions elaborate on the essential components of an express trust:
- The Settlor. The settlor, also known as the grantor or trustor, is the person who creates the trust and transfers trust property.
- Trust Property. Any type of property, real or personal, tangible or intangible, may serve as trust property.
- The Trustee. A trustee maintains the trust property and makes distributions to the beneficiary according to the terms of the trust. A trustee may be a person or a legal entity. The trustee owes a fiduciary duty to the beneficiary, which includes protecting trust property, investing prudently and making proper distributions.
- The Beneficiary. The beneficiary to a trust is the person who benefits from the trust property. A beneficiary may be a single person, a group of people, an organization, or a pet. The beneficiary need not be in existence at the time the trust is created.
- Trust Purpose. A trust must have a valid purpose. A valid purpose is defined as any legal purpose. Trusts are most commonly created to provide for support, education, asset protection, tax planning or to contribute to a charity.
Types of Express Trusts
Express trusts may take a number of different forms. The most common categories of express trusts are living trusts, testamentary trusts, revocable and irrevocable trusts, fixed trusts and discretionary trusts.
- Living Trusts. A living trust, or inter vivos trust, is created for the benefit of another during the settlor's life.
- Testamentary Trusts. Testamentary trusts are created by a settlor's will. A settlor's property is therefore transferred into the trust when the settlor dies.
- Revocable Trusts. A revocable trust allows the settlor to retain sole control of the trust. While the settlor does not receive any tax benefits from a revocable trust, the settlor can withdraw funds from the trust, or alter or cancel the trust at any time.
- Irrevocable Trusts. The trustee of an irrevocable trust is given sole control over the trust property. Typically, the trust will not come to an end until the trust purpose is fulfilled. The trust may be altered or revoked before this time only with the consent of the trustee and all beneficiaries.
- Fixed Trusts. Beneficiaries to a fixed trust receive trust property on a specific schedule set forth by the settlor. The trustee of a fixed trust has little or no discretion to distribute trust property.
- Discretionary Trusts. A discretionary trust gives the trustee the power to choose how and when, if at all, to distribute trust property to beneficiaries. A discretionary trust may provide significant tax benefits to beneficiaries since no beneficiary has an interest in trust assets until they are distributed.
Other Types of Trusts
While express trusts arise from the explicit instructions of a settlor, other types of trusts, such as constructive trusts and resulting trusts, are imposed by courts as equitable remedies that prevent unjust enrichment.
- Constructive Trusts. A constructive trust is imposed when a wrongdoer acquires legal title to property that rightfully belongs to another. Under the constructive trust, the wrongdoer becomes the trustee of the property, with a duty to return the property to the true owner.
- Resulting Trusts. A resulting trust arises when an express trust fails. The person who currently holds the property becomes a trustee and is obligated to return the trust property to the settlor.