Trusts: a simple guide to understanding Trusts.

Article Scope and Purpose: This article defines trusts generally, identifies the parties involved in trusts, and gives examples of they different types of trust.

Introduction

Trusts can be very effective ways of transferring and managing property within an estate plan. They can serve as good investment vehicles, tax havens, and a shelter for assets.

But what is a trust exactly? Wen are trusts used? Should you have one? These are common questions. Let’s give you some answers.

What is a Trust?

Definition of a Trust

A trust is a contractual agreement between three or more parties (businesses or people) to hold or manage some property in a particular way for the benefit of the beneficiary. To form a trust, one person (the settlor) transfers property to another (the trustee), and the trustee agrees to administer the property under the terms of the settlor for the benefit of a third party(ies) (the beneficiary(ies) of the trust). Each party to a trust arrangement has limited rights and responsibilities outlined in the trust documents and local law.

From a legally technical standpoint, a trust is a contract that splits the “legal title” and “equitable title” between the trustee and the beneficiary. Legal title typically includes the power to control the property (i.e. hold, manage, sell, or buy). Equitable title generally includes the right to benefit from the property or its fruits (like rents or proceeds from the sale of property). The type of title (legal or equitable) a party holds determines the rights and responsibilities of that party under the trust.

An Example of a Trust

Trusts are often easiest to understand through examples.

Imagine, you’re leaving town on a business trip on Monday and leaving your kids home. As the partent, you gave your eldest child $50 and told them to take your youngest child to the carnival, buy them a corndog, and pay for the youngest to ride rides. You created an oral trust arrangement between the three of you. You are the Grantor/Settlor and no longer hold the $50. Your eldest child is the trustee and holds legal title/control over the $50, with the power and obligation to spend it at the carnival on a corn dog and rides for your youngest. You appoint your youngest child as a the beneficiary (holding equitable title), entitling the youngest to receive a corndog and rides with the $50.

Though you didn’t directly state it, the eldest should receive some compensation for managing the purchase of the ticket and accompanying the younger child, likely including payment for the entry fees and rides for the eldest, otherwise, the eldest couldn’t get in and fulfill their other obligations (buy food or pay for rides). The eldest isn’t a beneficiary. The second ticket may constitute an administrative expense reasonably authorized under the trust arrangement.

Below you can find more examples and types of trusts.

How is a Trust Formed?

As previously stated, to form a trust, one person (the settlor) transfers property to another (the trustee), and the trustee agrees to administer the property under the terms of the settlor for the benefit of a third party(ies) (the beneficiary(ies) of the trust). Written documents form the trust and outline the obligations of each party.

Who are the Members or Parties of a Trust?

The Grantor or Settlor initially holds legal and equitable title to the property; however, once the trust is created, the Settlor gives the legal title of the property to the Trustee (giving up ownership and control over the property, except in some limited cases), and states the rules and rights of the other parties involved in the trust.

The Trustee receives legal title to the property. The Trustee has legal control over the property, and must follow the intentions and directions outlined by the Settlor. The Trustee has duties to the Settlor and Beneficiary. The trust gives the trustee control over the assets. The trustee is responsible for managing the assets for the benefit of the trust’s beneficiaries. Trustees must act reasonably and administer the trust for the benefit of the beneficiary(ies). Trustee is entitled to reasonable compensation for services rendered. Trustees can withdraw or resign as trustees. If the trustee does not perform their duties responsibly, then the beneficiary or settlor may file suit for specific performance and damages. See Trust Disputes below.

At creation, the Beneficiary receives the equitable title and is entitled to receive the benefits of the property under the trust terms. Beneficiaries don’t have legal control over the property and are subject to the terms stated by the Grantor/Settlor.

Are there different types or kinds of Trusts?

There are many types of trusts for a variety of circumstances. Each type may have different legal and tax benefits or disadvantages. Common types of trusts include Irrevocable Trusts, Revocable Trusts, Living Trusts, Testamentary Trusts, Special Needs Trusts, Spend Thrift Trusts, Asset Protection Trusts, etc. Some trusts may fall into one or more of these categories or types depending on the provisions contained in the trust documents.

Revocable Trust vs. Irrevocable Trusts

Revocable trusts allow the grantor to modify or revoke the trust during their lifetime. You cannot alter irrevocable trusts once created.

Living Trust vs. Testamentary Trust

Living trusts take effect during the grantor’s lifetime. Testamentary trusts, on the other hand, takes effect after the grantor’s death in connection to a will.

In a testamentary trust, a parent sets up the trust as part of an estate plan. The parent, as the settlor, will create a trust through trust documents. As the parent, you may serve as the trustee of the trust until they pass away. Upon their death, through the trust documents, the trust will often appoint the oldest or most responsible child to be the new trustee (and administrator or executor under a will that coincides and works with the trust). The parent appoints all their children as beneficiaries under the trust, and it may include friends, family, or charities as beneficiaries. The trust documents outline how the new trustee will distribute or manage the property upon their death. Trusts are great ways to transfer property upon death and avoid probate.

Special Needs Trust

Special needs trusts are designed to provide for the financial needs of individuals with disabilities.

Asset Protection Trust

An asset protection trust is an irrevocable trust designed to protect the assets of the grantor from potential creditors. Assets placed in an asset protection trust are no longer considered to be owned by the grantor and are therefore protected from the grantor’s creditors. Because the trust is irrevocable, the grantor cannot take back the assets once transferred into the trust. Use of Asset protection trusts often occurs in states or countries with favorable asset protection laws. High net worth individuals, such as such as doctors or business owners, may chose to use such trusts because they have greater risk of being sued. It’s important to note that asset protection trusts are not a guaranteed form of protection and may not hold up in court if established with fraudulent intent or under certain circumstances.

Spend Thrift Trust

Parents of financially irresponsible individuals, such as minors or individuals with addiction or mental health issues, may form Spendthrift trusts to provide those individuals and protect those assets from creditors and bad spending habits. In a spendthrift trust, the trustee holds and manages the assets for the benefit of the beneficiary, but the beneficiary does not have control over the assets or the ability to access them directly. Instead, the trusteehas full discretion to distribute the trust assets to the beneficiary according to the terms of the trust. Because the beneficiary does not have direct access to the assets, creditors and beneficiary’s own financial mismanagement cannot access them.

Real Estate Trusts

Another common example of a trust applies in the sale or purchase of real estate. Often a seller or buyer will select a title or escrow company to hold earnest money, loan proceeds, or payments until the sellers or buyers complete certain obligations. Once completed, the title or escrow officer will distribute the money in accordance with the escrow agreement.

Deed of Trust

Deeds of Trust (similar to a mortgage) are other common forms of Trusts. See our Deed of Trust page for more details. In summary, the purchaser of real property (as the borrower or new owner) gives the lender’s trustee a Deed of Trust. If the new purchaser/borrower fails to pay the loan in accordance with the terms of the loan agreement or promissory note, the trust deed authorizes the trustee to foreclosure on the property or give the property by deed to he lender in satisfaction of the loan.

What if Trustees are not behaving reasonably?

Trust Disputes

If a trustee isn’t otherwise acting correctly under a trust, there are several options available to the beneficiaries to address the issue. First, the beneficiaries may try to resolve the issue informally by communicating with the trustee and expressing their concerns. If that doesn’t work, the beneficiaries may be able to petition the court to have the trustee removed and replaced with a new trustee. The beneficiaries may also be able to sue the trustee for breach of fiduciary duty and seek damages for any harm caused by the trustee’s actions or inaction. Additionally, the beneficiaries may be able to seek an accounting of the trust’s assets and transactions to ensure that the trustee is managing the trust properly. The settlor or beneficiaries may also request the court change or appoint a new trustee as well.

It’s important to note that the options available to the beneficiaries will depend on the specific circumstances of the case and the terms of the trust. It’s advisable to seek the advice of an experienced attorney if you are a beneficiary of a trust and have concerns about the actions of the trustee.

What Law Governs Trusts in Utah?

The Utah Uniform Trust Code governs trusts in Utah (codified at Utah Code Ann. 75-7).

CONCLUSION

Trusts offer many benefits and structures to meet particular needs. People most often use trusts to transfer property upon death and avoid probate. Incorrectly drafted trusts may not represent the clear intentions of the creator and may cause disputes between parties, especially between siblings after a parent has passed. An experienced attorney should draft Trust documents.

Our firm handles estate plans and real estate transactions on a regular basis. We can provide you with the counsel you need. Please contact us if you need information on an existing trust or help forming a new trust.

Legal Disclaimer: The information contained here is for educational purposes only. This information is not a substitute for legal guidance. Each situation is unique. Contact our firm for legal counsel on deeds, trusts, and other real estate matters within the State of Utah.