By Lisa Hughes
Attorney and Partner,
Yates Campbell & Hoeg LLP
As you probably know, a contract is an agreement between two parties that sets out the rights and responsibilities that each party owes to the other.
So, if I sell my car, the buyer and I need to agree on the price and the date of the exchange of the car, the keys, and other accessories included in the purchase price. We also need to agree on whether the purchase price will be paid with cash, check, or another form of payment.
The contract could be in written form or by oral agreement.
A trust is a contract that’s on steroids.
While contracts are between buyers and sellers, every trust involves three parties:
- Settlor: The party that creates the trust is usually called the “settlor,” although “grantor” and “trustor” are synonymous terms. The settlor “settles” the trust by outlining the settlor’s desires for how the trust property will be administered. Finally, the settlor indicates the party or parties who will benefit from the trust arrangement.
- Trustee: The “trustee” is the party responsible for carrying out the settlor’s desires and intentions regarding the trust property. The trustee is entrusted with most of the responsibilities in the trust relationship.
- Beneficiary: Those who benefit from the trust are called the “beneficiaries.”
Just as the consumption of steroids can create serious side effects, it’s important to consider the side effects of “trust use” or “trust abuse” before you ask your attorney to prescribe a trust for you.
Here are answers to the big FAQs on trusts:
1. Does a trust have to be a written document? No. A trust agreement can be a written document, an oral agreement, or even simply inferred to exist in certain circumstances. An inferred trust is usually called a “constructive trust.” Although lawyers spend a good deal of time in law school and in litigation on oral and inferred trust relationships, when most people consider trusts, they are referring to a written trust instrument.
2. Why would someone want to create a trust? In the simplest situation, a trust is desirable when the settlor (the person creating the trust) wants to bifurcate the responsibilities and decision-making over property from the beneficial enjoyment of that property. In short, the settlor desires to control how the beneficiary will enjoy the benefits of the property. Most parents choose to name a trustee to control the property that their children will inherit if the parents die when the children are still too young to manage the property.
Other reasons for using a trust are when the settlor has concerns about the beneficiary’s ability to manage the property due to inexperience, lack of investment skills, disability, bad habits, bad judgment, or inclination to be influenced by others. Many lawyers include a “bad boy” clause in a trust instrument that reqires the beneficiary to pass a drug test or have a certain level of education before the beneficiary is permitted to manage the property outside of the trust.
3. Is a trust amendable or revocable after it is signed and funded? It depends.
- Some trusts are irrevocable, and intentionally so, as of the moment they are signed. Irrevocable trusts are usually created (and funded—meaning title to property is transferred to the trust so that the trust becomes the owner of the property) for the purpose of achieving goals in addition to controlling when and how the beneficiaries benefit from the trust property. These additional goals generally relate to tax minimization, charitable giving, or protecting assets from the reach of the settlor’s or the beneficiaries’ creditors.
- On the other hand, revocable trusts—meaning those that can be amended or revoked by the settlor, in whole or in part—are the second most common estate planning technique (after wills) that clients ask about when visiting their estate planning attorney. Trusts that are revocable by the settlor, or even two settlors, such as a husband and wife, can act as a “will substitute” for the settlor(s) because it can provide benefits to the settlor(s) during life and can provide for other beneficiaries after the death of the settlor(s).
- In addition to straightforward irrevocable trusts and revocable trusts, there are hybrid trusts, which can be partially irrevocable and partially revocable. Even trusts considered irrevocable are subject to modification or termination in certain circumstances, and vice versa for certain revocable trusts. The mechanisms for modifying and/or terminating irrevocable trusts are sometimes found in the express language of the trusts themselves, and sometimes governing law permits a judge, trustee, beneficiary, or a third party to modify or amend an otherwise irrevocable trust.
4. What are the typical duties of a trustee? A trustee’s role in the administration of a trust should not be understated. A trustee has a duty of loyalty to the trust, which means that the trustee must not use the trust to further the trustee’s own objectives, but must instead put the interests of the trust ahead of his or her own.
- Except in very limited circumstances, a trustee should not enter into a transaction with the trust over which he or she is the trustee. For example, a trustee should not buy assets from or sell his assets to the trust. A trustee should not loan money to the trust or borrow money from the trust. A trustee has a duty to be impartial, and cannot use the trust to benefit one beneficiary to the detriment of another without express instructions in the trust that authorize the trustee to do so.
- A trustee has a duty to act prudently and exercise care when administering the trust. This generally means that the trustee must invest with caution and pay attention to the investments so that they do not deteriorate. Usually, a trustee is required to obtain professional advice on investments, tax planning, and accounting in order to show that the trustee is acting prudently.
- Finally, in most states the trustee has a duty to inform and report to the settlor and/or the beneficiaries of the trust so that they can determine whether the trustee is, or is not, keeping up with his duties as trustee. However, even if your state does not impose a duty on trustees to inform and report to the settlor and/or beneficiaries, you could impose those duties on your trustee in your trust instrument.
5. How does one make sense of all the options relating to trusts? Absent attending law school, passing a bar examination, and practicing trusts and estates law for a minimum of five years on a full-time basis with a good mentor to teach you, there probably is no good way to determine what kind of trust makes sense in a specific situation.
Just as you should not order steroids online because you neither know for sure what you are going to get nor know whether it will cure what ails you, trust planning requires consultation with a skilled and competent attorney.
Questions? Contact Lisa Hughes by email.
About Lisa Hughes
Attorney Lisa M. Hughes is experienced at preparing wills and trusts, powers of attorney, guardianships, and conservatorships; in administering estates of decedents and incapacitated individuals; and in the related tax and asset-protection planning. Her particular areas of focus include succession planning for closely held businesses, same-sex couples, and incapacitated beneficiaries, as well as certain elder-law challenges and trusts for those with special needs.
A graduate of Georgetown University Law Center, Hughes is licensed in the District of Columbia, Maryland, and Virginia, and has more than two decades of experience in estates, trusts, and wealth-planning.
Additionally, Hughes is a member of the Board of Governors of the Trusts and Estates Section of the Virginia State Bar; she is a Public Safety Trainer with the Commonwealth Autism Service; and she serves as legal counsel to Spectrum Housing Foundation, a tax-exempt organization that facilitates support for disabled adults.