A trust is simply a document that contains provisions whereby one person makes provision for someone to manage his or her property. There are several types of trusts in common usage. A trust can be characterized by whether its terms are revocable (subject to change or cancellation by the creator) or irrevocable (not subject to change or cancellation by the creator). A trust can also be characterized by when it becomes effective. Living trusts are those established during the creator's lifetime. Testamentary trusts are those created in a will that only come into being upon the creator's death. When a trust is revocable, the creator generally reserves the power to transfer assets into and out of the trust, to amend the trust provisions or to revoke the trust altogether.
Regardless of the type of trust, each has common features. First, in order to be valid, a trust needs to be funded, i.e., have the ownership of assets transferred under its umbrella. The transfer of assets is accomplished by either changing the ownership of the asset to the trust or making the trust its beneficiary. Unfortunately, many people go through the time and expense of having a trust created but never take the all-important step of funding it. An unfunded trust is virtually worthless.
The trust needs to have provisions stating who is authorized to manage the assets in the trust. This person is called the trustee. Generally, the person creating the trust is the initial trustee. He or she identifies a successor trustee to take over the management of the trust in the event that he or she is unable to do so. I recommend that there also be an alternate successor trustee named, just in case the first choice is unable or unwilling to act. If there is no trustee designated in the trust itself, or if those set forth in the trust are not able to take over the management of the trust, someone will have to go to court to have a trustee appointed.
The trust should specify the purposes for which the assets are to be used. The typical revocable living trust specifies that the assets are to be used for the benefit of the creator during his or her lifetime. The trust also states what will happen to those assets when the creator passes away. They will either be given outright to one or more beneficiaries or remain in the trust over an extended period of time to be managed by the trustee for the benefit of the beneficiaries. Some trusts can continue on for decades, depending on the terms the creator sets.
In most trusts, the greater portion of the verbiage is devoted to spelling out the powers and duties of the trustee. Some drafters go to great lengths to spell out every possible transaction that a trustee might need to have authority for; others summarize the powers of the trustee. These provisions will guide the trustee in his or her dealings with third parties because the trustee can only do what the trust authorizes him or her to do. Many times a third party will request to see a copy of the trust to make sure that whatever the trustee is trying to do is indeed authorized under the trust provisions. A well-drafted trust will have all of the above components.
© 2013 by Marlene S. Cooper. All rights reserved.