Essay on "Trust Is a Valuable Tool"

Essay 9 pages (2962 words) Sources: 1

[EXCERPT] . . . .

trust is a valuable tool in the process of organizing an estate plan. A trust is a legally created entity that is created for the expressed purpose of holding assets that are managed in accordance with the terms dictated by the trust document. The individual creating the trust, the grantor, describes how he wants the trust assets to be managed and distributed. In creating the trust an individual or institution is designated as the trustee. The trustee is empowered to manage the trust in accordance with the written terms of that trust. Trusts are ordinarily created for the benefit of designated beneficiaries. There are several general forms of trusts. One form is a revocable trust. Revocable trusts allow the grantor to change his mind and withdraw assets from the trust. Irrevocable trusts, on the other hand, require that the grantor surrender permanent control over the assets unless the terms of the trust dictate otherwise. The creation of a trust can be a simple matter but the creation of some trusts are extremely complicated and require the expertise of an individual thoroughly trained in the law of trusts as the tax implications can be highly confusing.

Chapter 2: Elements of Trust

There are essential elements that must be satisfied in order for a valid trust to be created. First, there must be a trustee. This individual holds legal title to the trust property but holds it on behalf of the beneficiaries who hold equitable title. The second element is that there must be property in the trust. This property must be capable of being owned. Typically, such property is in the form of land or stocks. Items such as pension funds cannot form the corpus of a trust. Every trust must have a beneficiary. Such beneficiary must be either an individual or a charity. The beneficiary must be capable of benefiting from the trust. A trust that does not have a designated beneficiary is unenforceable. The final element is that the trustee must handle the trust property for the benefit of the beneficiaries and in accordance with the terms of the trust.

Chapter 3: Creation of Express Trusts

In creating an express trust there must exist a stated intent to create a trust. There is no specific language required in expressing this intent but it must be clearly understood. In most cases, allowing the beneficiary to know that the trust exists aids in establishing intent. At the time that the trust is created the individual creating the trust must have the legal capacity to create the trust. This means that he or she must able to understand the effect of the trust. Additionally, the designated trustee, whether an individual or institution, must also have the capacity to serve in such position. As the third element of trust creation, the terms of the trust in most circumstances must be in writing in order to comply with the Statute of Frauds. Trusts may be created for nearly any purpose as long as said purpose is neither illegal or against public policy. Trusts that are created, for example, to avoid the payment of creditors would be against public policy and, therefore, invalid and unenforceable. There must be at least one beneficiary designated to receive the benefits of the trust. If a beneficiary, either an individual or charity, is not designated the trust is deemed to be unenforceable and the trustee is free to carry out the terms of the trust but there is no one who can force such enforcement. Once the trust is created and property is transferred to the management of the trustee the trust holds legal title to the trust property and the beneficiary holds equitable title. In drafting trust agreements careful attention must be afforded the Rule against Perpetuities and Restraints on Alienation. These two ancient concepts are applied differently depending on the jurisdiction but their application might frustrate the intent of the grantor in creating the trust and special attention must be afforded both concepts.

Chapter 4: Transfer of Beneficiary's Interest

Under normal circumstances the beneficiary to a legal trust owns an equitable interest in the property that forms the corpus of the trust, that is, he or she is entitled to the benefits that the property generates in accordance with the terms of the trust. This equitable interest can be sold, transferred or assigned just like any property interest. The terms of the trust, however, may limit the ability of a beneficiary to dispose of his or her interest. For example, the trust may stipulate that any attempt by a beneficiary to sell, transfer, or otherwise dispose of the interest may result in the equitable interest reverting to someone else. There is even a special provision in many trusts that are identified as spendthrift clauses that expand on the beneficiaries' use of trust proceeds. Such provisions are commonly used in situations where the beneficiary has a history of poor money management.

Chapter 5: Charitable Trusts

Often times the beneficiary of the trust is a charity of some form. Like all trusts the charity designated as the beneficiary can be of any form so long as it is legal recognized as such. Charitable trusts can take on several forms. A grantor can designate the charity as a beneficiary without any limitations but there is a hybrid form of charitable trust known as a charitable remainder trust (CRT) which allows the grantor the ability to make a gift to charity while still reserving some benefit for the grantor. This type of trust is particularly useful in situations where the trust involves property that has appreciated significantly in value and the outright sale would generate substantial capital gain taxes. In effect, what occurs is that the charity becomes the owner of the property but the grantor retains the income generated by the property. Once the grantor dies or terminates the trust the property reverts totally to the charity. There are three specific forms of CRTs with each involving different benefits for the charity and the grantor. Under the terms of the charitable remainder annuity trust the grantor receives a fixed percentage of the original trust property. The second form is the charitable remainder unitrust. In this form the grantor receives a fixed percentage of the fair market value of the property as opposed to the value of the property when the trust is created. This form allows the grantor to benefit in any appreciation that might occur. The final form is the charitable lead trust. In this form the grantor retains title to the property and the charity receives all the income from the property during the time that trust continues but once the trust is terminated the property reverts to the grantor or his heirs. All charitable remainder trusts must be irrevocable in order to be enforceable. The grantor, however, does maintain the authority to change the beneficiary assuming that he reserved such power at the time that the trust was created.

Chapter 6: Trust Administration

The administration of an estate is a heavy responsibility and is not one to be taken lightly. Although it may seem obvious but the first step in administering an estate is to familiarize oneself with the trust agreement. A careful reading of the agreement is necessary to provide the trustee with a roadmap of how to proceed in the administration of the trust. This roadmap will include a list of the beneficiaries; the nature of the trust property, how distributions are to made, what documentation is going to be necessary, and which state laws will govern the administration. Once the trustee familiarizes himself with the trust document he must begin to list the property funding the trust, probate any property that it is outside the trust, place claims for any applicable insurance proceeds, and clear the title of any property. Concurrently, the trustee should begin notifying the various beneficiaries named under the term of the trust. Once the property constituting the trust have been properly accounted for, probated, and titled an accounting and appraisal should be provided the beneficiaries. This serves the dual purpose of providing the beneficiaries with a clear picture of the status of the trust and makes later compliance with tax filings and other government requirements an easier task. As trusts cannot be used to defraud creditors the trustee must make sure that all possible claims against the trust are properly addressed before making any distributions under the terms of the trust. At this point, the trustee is now in a position to begin making distributions under the terms of the trust. The trustee has a fiduciary duty to the trust to distribute the proceeds in accordance with the trust language. In the case of any confusion, the trustee must present the issue to the court for direction. During the life of the trust the trustee must keep a record of all distributions until the term of the trust expires.

Chapter 7: Accounting for income and principal

In the… READ MORE

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