2. Trusts
Trust: An arrangement in which title to property is held by one
person (the trustee) for the benefit of another person (the
beneficiary).
• Can be created for any reason that is not illegal or against public
policy.
• Can be an Express Trust or an Implied Trust
3. The 4 Elements of a Trust
1. Must have a designated beneficiary.
2. Must have a designated trustee.
3. Must have a fund sufficiently identified to enable title to
pass to the trustee. (i.e. Purpose of the trust must be explicit
in order for it to be carried out successfully.)
4. Actual delivery from the grantor/settlor (the person
creating the trust) to the trustee with the intention of passing
title. (i.e. The grantor/settlor must demonstrate intent to
create and carry out the trust.)
4. Types of Trusts
Express Trusts
A. Living Trust
1. Revocable Living Trust
2. Irrevocable Living Trust
B. Testamentary Trust
C. Charitable Trust
D. Spendthrift Trust
E. Totten Trust
Implied Trusts
A. Constructive Trusts
B. Resulting Trusts
5. Living Trusts
“Inter Vivos” Trusts
Living Trusts are called such because they are created by the grantor
during their lifetime.
The “Inter Vivos” Trust has become a popular estate-planning tool. Its
popularity is due to the fact that at the grantor’s death, the assets held
in a living trust do not have to go through probate and will pass directly
to provided heirs.
Important Notes on Living Trusts:
1. This type of trust does not shelter assets from estate taxes.
2. Depending on if the trust is revocable or irrevocable, the grantor may
be required to pay income taxes on the earnings of the trust.
6. Revocable Living Trusts
• Most common type of living trust.
• Grantor retains control over trust property during their lifetime.
• Property is deeded to the trust, but grantor retains power to amend,
alter, or revoke the trust during their lifetime.
• Grantor is permitted to serve as a trustee/co-trustee of the trust.
• Because the grantor retains this control, they are required to pay
income taxes on any trust earnings.
• On the grantor’s death, the principal (the property/assets that were
deeded) will be transferred to the beneficiaries of the trust.
7. Example of Revocable Living
Trust
James & Sarah own and operate a large farm. They also have three children: Alicia, Emma,
and Jayden. After Sarah’s death, James creates a Revocable Living Trust.
In this scenario, James is the grantor of the trust AND the trustee (during his lifetime). James
names his son, Jayden, as the successor trustee. The successor trustee is the person acting
as trustee once the original trustee has died or become incapacitated. This gives Jayden the
power to manage and carry out the trust when his father is no longer able.
While alive, James and his children are income beneficiaries of the trust. On his death, his
children become remainder beneficiaries, receiving the farm and the remaining existing
assets between them.
When James dies, the farm will pass to his named heirs without having to go through
probate court.
8. Irrevocable Living Trusts
• Grantor permanently gives control of the property to the trustee upon creation of the
Irrevocable Living Trust.
• Grantor executes a trust deed (deed of conveyance creating & setting out conditions
of a trust) which passes legal title from the grantor to the named trustee.
• Once the trust is formed, it cannot be readily adjusted. This makes it a good way to
protect assets from creditors as the assets are neither legally owned or controlled
by the grantor.
• Trustee must maintain the trust property & make it productive (ex: if trust property is
real estate, property must be kept-up, not left to deteriorate, & not left vacant for too
long).
• If specified in terms of the agreement, the trustee may be required to pay income to
the beneficiaries.
• Grantor is NOT required to pay income taxes on the trust earnings.
Why not? Because he effectively gave over property for the benefit of the
beneficiaries.
• Requires “arm-length” trustee. No relatives permitted. Cannot be agent of the
grantor, nor attorney, accountant, or employee. These people named as trustees
will invalidate the trust.
9. Testamentary Trust
• Created by one’s will.
• Not in effect until the grantor’s death.
• Trustees of Testamentary Trusts may be specifically identified in the
grantor’s will or may be appointed by a court.
• Trustee holds legal title to the trust property.
• Judicial approval must be given to the trustee before any actions
involving the trust property.
• Legal responsibilities identical to those in living trusts.
• If a will that made provisions for a Testamentary Trust to be created
is found to be invalid, the trust is also invalid.
• In the above scenario, the property that was intended to be placed in
trust will be passed according to intestacy laws rather than
according to instructions in the trust.
10. Charitable Trusts
• Express trust created for the benefit of a segment of the
public or the general public.
• The property held by a Charitable Trust must be used for a
charitable purpose, such as for the advancement of health,
education, or religion.
• How is this type of trust different from others?
The identities of the beneficiaries are uncertain & it can be
established to last indefinitely. Can be a living trust (created
and in existence during the grantor’s lifetime) or a
testamentary trust (written into one’s will and existing only at
the grantor’s death).
11. Spendthrift Trust
• Created to provide for the beneficiary while also protecting
them from spending all the funds to which they are
entitled.
• Only a certain portion of the total amount is given to the
beneficiary at any one time.
• Most states prohibit creditors from attaching to Spendthrift
Trust assets.
• Beneficiary is not permitted to transfer their rights or
assign their rights to the trust to another individual.
12. Totten Trusts
• Created when a person deposits funds into a bank account under
their own name with instructions that whatever is contained within
that account shall pass to a specific & named beneficiary at the
death of the grantor.
• Up until the grantor’s death or deliverance of the trust assets, the
trust is revocable at will.
• A totten trust is completed when the funds have been delivered
to the intended beneficiary.
• Beneficiary has no access to funds until the grantor’s death, but
is then given property rights to the funds.
• Funds not subject to probate.
• Sometimes called the “poor man’s will” or even “tentative trust,”
as it is dependent on the grantor’s death.
13. Implied Trusts
• In the absence of an express trust, sometimes a trust will
be imposed (implied) by a court of law.
• Two types:
1. Resulting Trusts
2. Constructive Trusts
14. Constructive Trusts
• Equitable trust that is imposed by the court in the interest
of fairness and justice when someone wrongfully holds
legal title to a property.
• Often imposed when a person in a confidential or fiduciary
relationship with another breaches a duty to that person.
• In a constructive trust, the owner of the property is
declared the trustee for the parties that are actually
entitled to the benefits that flow from the property.
15. Example of Constructive
Trust
• Stella’s bank account and other financial assets are valued at $500,000.
She adds her niece, Genevieve, as a joint owner to her bank account and
other assets.
• Separately, Stella executed a will which divided her assets equally among
her several nieces, nephews, and cousins. She named Genevieve and a
nephew, Richard, as coexecutors of this will. She did not inform her
attorney that Genevieve was co-owner of her bank account and other
assets.
• When Stella died, Genevieve emptied Stella’s safe, removed financial
records, and claimed the money in the bank account was hers. The other
relatives filed a suit asking for the court to order a constructive trust be
created.
• The court found that Stella had committed fraud and would be unjustly
enriched were she permitted to keep all the funds. As such, all funds
were entered into a constructive trust.
16. Resulting Trusts
• Implied Trust that arises when one party holds legal title to
another’s property for the sole benefit of that other party.
• Resulting trusts arise from the conduct of the parties
involved.
17. Example of Resulting Trust
• Gabriela owns one acre of land that she would like to put on the market
for sale.
• However, Gabriela has imminent plans to leave the country for two years
and will therefore be unable to deed the property to anyone during that
time.
• She decides to deed the property to her friend, Oswald, for the purpose of
selling the property while she is away.
• The conveyance of the property from Gabriela to Oswald was neither a
transaction of sale or of gift, so instead the property is held in a Resulting
Trust for the sole benefit of Gabriela upon her return.
• If Oswald sells the property, the proceeds from the sale will then be held
in the constructive trust.
• Upon Gabriela’s return, Oswald will be required to either deed the
property back to Gabriela if he was unable to sell the property, or if he
was successful, turn over the proceeds.
18. The Trustee
Trustee: the person holding the trust property.
Who is eligible to be a trustee?
• Anyone legally capable of holding title to and dealing in
property.
What is expected of a trustee?
• Honesty, acting in good faith, prudence, and loyalty to the
beneficiary.
• Must act in exclusive interest of beneficiary.
19. The 5 Specific Duties of a
Trustee
1. Maintain clear & accurate accounts of the trust’s
administration.
2. Furnish complete & correct information about the trust & its
administration to the beneficiary.
3. Keep trust assets separate from own assets.
4. Pay an income beneficiary the net income of the trust
assets at a reasonable interval.
5. Limit the risk of loss from investments by reasonable
diversification & dispose of assets that do not represent
prudent investments.
(Prudent investment choices may include federal, state,
municipal bonds & some corporate bonds & stocks)
20. Powers of the Trustee
• These may be set by the grantor during initial creation of
the trust.
• If no specific terms are provided, state law will determine
the trustee’s powers. (Often restricts trustee’s ability to
invest funds. Typically only allows for conversation debt
securities such as government, utility, and railroad bonds.)
• Trustee responsible for carrying out purpose of the trust
even if no specific terms are provided by the grantor.
• If the trustee doesn’t comply with their duties, they are
personally liable for any losses.
21. Allocations between Principal
& Income
• Sometimes grantor’s will provide one beneficiary with a life estate
and another with a remainder interest in the trust.
• For example, a farmer who creates a testamentary trust may
provide the farm’s income be paid to the surviving spouse and that
on the spouse’s death, the farm be passed to their children.
22. Allocations Between
Principal & Income
Life Estate
(The Income)
Farm’s income paid to wife
Ordinary Receipts
Rent from Trust Property
Property Taxes
Remainder Interest
(The Principal)
On wife’s death, farm given to children
Extraordinary Receipts
Long-term Improvements
Proceeds from Property’s Sale
23. Trust Termination
• Must expressly state event that must occur for termination
of the trust. Often, termination at the beneficiary’s death or
termination at the trustee’s death.
• If trust does not state that it terminates at the death of the
beneficiary, then it will continue to exist even if there is no
longer a beneficiary to receive funds.
• If the trust purpose becomes illegal or impossible, the trust
would terminate.
• Typically, trusts provide termination date.
Example: When beneficiary graduates college, when
beneficiary turns 25 years of age.
24. Key Terms
• Trust: An arrangement in which title to property is held by
one person (a trustee) for the benefit of another (a
beneficiary).
• Living (Inter Vivos) Trust: a trust created by the grantor
(settlor) and effective during their lifetime.
• Testamentary Trust: a trust that is created by will and
therefore does not take effect until the death of the
testator.
• Charitable Trust: a trust in which the property held by the
trustee must be used for a charitable purpose, such as the
advancement of health, education, or religion.
25. Key Terms, cont.
• Spendthrift Trust: a trust created to protect the beneficiary from
spending all the funds to which they are entitled. Only a certain
portion of the total amount is given to the beneficiary at any one
time, and most states prohibit creditors from attaching assets of the
trust.
• Totten Trust: a trust created when a person deposits funds in their
own name for a specific beneficiary, who will receive the funds on
the depositor’s death. The trust is revocable at will until the depositor
dies or completes the gift.
• Constructive Trust: an equitable trust that is imposed in the interests
of fairness and justice when someone wrongfully holds legal title to
property.
• Resulting Trust: An implied trust that arises when one party holds
the legal title to another’s property only for that other’s benefit.
