Trust Lesson

A Trust is an arrangement where one person or organization manages property on behalf of another. It is governed by a written document which usually is a deed. It is also governed by local law. People or organizations that can be used to manage this type of transaction are Banks, friends, family, lawyers, or pretty much anybody you choose to name. Once you name this person they have an obligation to carry out your wishes as outlined in the document.

The person or organization with the obligation to manage the property is called the executor or custodian and the person who creates the document is called the settlor. Any kind of property can be held in the custody of this person or entity. A living trust can be established while you are alive allowing you to maintain control of your property while you are alive. This type of instrument can also be created by a will. Legally the property must be clearly defined in the document to make sure there is no misunderstanding about the property that is suppose to transfer to the beneficiary. The beneficiary has to be clearly defined even if it’s someone that’s not born at the time the document is created. For example you may want to leave property to your future children or grandchildren. You can also make the beneficiary a charity. Sometimes the documents are created purely for privacy purposes because a will is a public record. Sometimes they are created because the beneficiary is not capable of managing the property themselves.

• Constructive: It’s imposed by the law as a remedy to resolve a wrong done by one party to another. This may be a circumstance where a bank has done wrong and is forced to pass property on to the person rightfully entitled to the property.
• Express: Is created when a person deliberately and consciously creates it over his or her assets, either now or at death. This happens by signing a will or trust deed. This is a good instrument because you can decide how your assets will be distributed either while you are alive or you can have it created at your death via your will. The benefit of this is your beneficiary won’t have to go through the probate process to get the assets you intend for them to have. It saves time and eliminates a lot of hassle. The entity lives even after you are gone so you can name it something that you want to be around and if your beneficiary continues to make it grow you will still get recognition for your efforts.
• Fixed: The settlement of the assets is decided in advance and the person creating it has no discretion in how the assets will be delivered to the beneficiary. This means once you decide on the way the assets will be settled you will have no discretion in how they will be delivered. Unlike other types of funds you can’t put stipulation on what the person has to do to receive the funds.
• Hybrid: This instrument defines exactly how the executor has to deliver part of the assets to the beneficiaries but give them some discretion with the additional assets. In this case parts of the assets carry specific instructions that the executor has to carry out but the executor has some discretion with the rest of the assets.
• Implied: Is legally enforced when some of the formalities of and expressed trust are not executed properly. The courts will determine how the document will be executed. This would happen when the executor didn’t do what they were supposed to do and I would imagine someone would have to file a claim against the executor to get the courts to step in and take action.
• Incentive: This type may be used to encourage a certain type of behavior. You may want to say your child can get a certain amount of your assets if he/she finishes college. This may be good for a kid that needs that extra push that you would be giving them if you were still around but since you are not you can provide some financial incentive for them to finish college. Some people use incentives to try to keep people from abusing drugs or alcohol. I think this is a worthy cause but probably one of the most difficult things to get accomplished especially if the person is using a drug such as crack. I would be afraid they would do what they had to do to get the money because as we all know a crack addict is motivated by money but only to use it to buy more crack. In my opinion the incentives give you the ability to control things from your grave. Sometimes this can be a problem because the settler can’t always anticipate all the uncertainties that can arise making it difficult for the beneficiary to comply with the requirements. Because of this it’s possible for the beneficiary not to be able to get assets that you actually want them to have because of a technicality that they can’t overcome. It could also work in the opposite way as described above in the example of the crack addict. In this case you would not want them to get the money but if they stayed sober for a specified period of time the executor would be forced to give them the money only to have them start using crack again.
• Irrevocable: The terms can not be revised or amended until the terms or purpose of the document have been completed. In some rare cases the courts may change the terms due to unexpected changes in circumstances that make the fund uneconomical or unwieldy to administer. With this one you have to be absolutely sure you want to take the action you describe in the document because once you sign you are committed forever. In my opinion there are so many other options that I can’t think of very many reason to use this type of instrument.
• Private and Public: They have one or more particular individuals as its beneficiary. A Public Trust has some charitable end as its beneficiary. In order to qualify as charitable it must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable fund, by analogy. Charitable funds are entitled to special treatment under the law and also taxation. This is a great way to have your funds used to help a worthy cause. Many people that are inflicted with a terminal illness leave money to a charity to help fight the disease so that others may not have to suffer as they did.
• Protective: In the USA, it was devised for use in estate planning. When Person, A, wishes to leave property to Person B. Person A however fears that the property might be claimed by creditors before Person A dies, and that therefore Person B would receive none of it. Person A could execute the document with Person B as the beneficiary, but then Person A would not be entitled to use of the property before they died. Protectives were developed as a solution to this situation. Person A would establish the instrument with both Person A and Person B as beneficiaries, with the trustee instructed to allow Person A use of the property until they died, and thereafter to allow its use to Person B. The property is then safe from being claimed by Person A's creditors, at least as long as the debt was entered into after the trust's establishment. This instrument could be executed to protect assets from creditors while the person executing the document is alive so upon their death their beneficiary would still get their assets.
• Resulting: Is a form of implied trust which occurs where (1) a trust fails, wholly or in part, as a result of which the settlor becomes entitled to the assets; or (2) a voluntary payment is made by A to B in circumstances which do not suggest gifting. B becomes the resulting trustee of A's payment.
• Revocable: Can be amended, altered or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable’s are becoming increasingly common in the United States as a substitute for a will to minimize administrative costs associated with probate and to provide centralized administration of a person's final affairs after death. This is probably the most common in use because it allows you to control who, what, when, where, and how your assets are handled while you are alive. However, if at any time you change your mind you can make changes while you are alive.
• Spendthrift: Is put into place for the benefit of a person who is unable to control their spending. It gives the executor the power to decide how the trust funds may be spent for the benefit of the beneficiary. This is the fund I would use for the person that has an addiction so the executor can control the funds and not allow them to waste the funds on drugs and alcohol. I would be very careful of who I selected as the executor because I would want to make sure it was a person I could feel comfortable they would do the right thing and not take advantage of the power I am leaving in their hand. I also think this would be a huge responsibility for the executor because they could be open to criticism no mater what they do. Personally I think I would choose a very close family member that I knew had love for my beneficiary.