2. Trusts

a. Most frequently used trusts

i. Inter vivos trusts

An inter vivos trust is usually created by written declaration or agreement. Some states allow a trust over personal property to be declared orally. Any competent adult may settle a trust. In most states, an inter vivos trust is irrevocable unless the settlor includes a clause retaining the right to revoke.

ii. Testamentary trusts

A testamentary trust is one that is to take effect on the death of the person making it. It is most often created under the will of the settlor and duly admitted to probate following death. State requirements for creation of testamentary trusts are generally the same as those for the execution of wills.

b. Governing law

Governing law determines construction and administration matters, as well as validity. The governing law of a trust may, in most states, be designated in the trust instrument if a substantial relation exists between the trust and the designated state and if the terms of the trust do not violate a public policy of that state. Where the governing law is not so designated, traditional conflicts of law principles apply and vary, depending on the matter to be determined and whether the trust is testamentary or inter vivos.

c. Creation of a trust

i. Valid constitution

The creation of private trusts follows common law principles. The settlor conveys legal title to a trustee, and equitable title to a beneficiary or beneficiaries.

ii. Duration and Termination

Trusts are not limited in duration so long as all the interests vest within the period of the rule against perpetuities. Several states have abolished or substantially altered this rule.

Although the terms of a trust may stipulate its duration, a trust may be terminated earlier by operation of law. Under certain circumstances or specific state statutes, a trust may be terminated if all the beneficiaries of a trust and the settlor consent to the termination of the trust, regardless of whether the purposes of the trust have been accomplished.

iii. Beneficiaries

Trust beneficiaries must be specifically named or sufficiently described so that their identity can be ascertained when the trust is established or within the period of the rule against perpetuities. Beneficiaries may include any natural person, corporation, or class of persons if the class is definitely ascertainable. A beneficiary of a trust may also be the trustee, except that, absent a specific state statute, a trustee may not be the sole beneficiary of a trust. The settlor of an inter vivos trust may be a beneficiary of the trust, although it may have gift and estate tax consequences.

iv. Trustees

A trust will not be rendered invalid by the lack of a trustee. A court will appoint a trustee if the other requisite elements of a trust relationship are present. Any adult individual or entity with legal capacity to hold and administer property may serve as trustee or co-trustee, although state law may impose additional restrictions or qualifications. The trust document may include provisions for the resignation, removal and succession of trustees. Under certain circumstances, a court may remove a trustee and replace the trustee with a successor.

v. Protectors

A trust may confer upon an individual, a committee of individuals, or an entity, powers that supersede or restrict certain powers of the trustee, such as the power to remove and replace trustees.

d. Trust administration

i. General management

Trustees are required to administer trust property solely in the interest of the beneficiaries and deal impartially with them. The trustee owes a duty to keep trust property separate and to preserve the property and make it productive. The trustee must exercise ordinary care in handling the investments of the trust, but if the trustee possesses special skills, the trustee may be held to a higher standard of care.

ii. Distributions from trust

Trustees have an absolute and unqualified duty to make payments and distributions to the correct beneficiary and in the manner specified by the trust instrument, whether in cash or in property.

iii. Passing of accounts

Trustees are under a duty to keep clear and accurate accounts. In general, a successor trustee is not liable for a predecessor trustee’s breaches of trust. State statutes often provide that a successor trustee is not required to inquire into the acts of the outgoing trustee but may accept (often with beneficiary approval) the accounts rendered and the property received in complete discharge of the predecessor trustee without incurring any liability for so doing.

iv. Variation of a trust

A court has the power to direct or permit the trustee to deviate from trust provisions if the court determines that compliance with the provisions is impossible or illegal, or if, under circumstances that were not anticipated by the settlor, the provisions would defeat the settlor’s purposes for establishing the trust. The settlor may retain the power to vary an inter vivos trust or may include a power of appointment authorising the holder of the power, often a beneficiary, to vary the trust by subjecting the property to different provisions or donating it free of trust.

e. Confidentiality and disclosure

Disclosure to the beneficiary is not required when creating a trust relationship. The trustee is, however, under a duty, with certain exceptions, to inform the beneficiaries of the existence of the trust. The trustee is also under a duty to provide the beneficiaries, on their request, with a copy of the trust agreement, information regarding trust assets, and a trust accounting, at an appropriate time or times.