United States trust law is the body of law that regulates the legal instrument for holding wealth known as a trust.
Most of the law regulating the creation and administration of trusts in the United States is now statutory at the state level. In August 2004, the National Conference of Commissioners on Uniform State Laws created the first attempt to codify generally accepted common law principles in Anglo-American law regarding trusts into a uniform statutory code for the fifty states, called the Uniform Trust Code (UTC).See http://www.nccusl.org/Update/uniformact_summaries/uniformacts-s-utc2000.asp As of July 2012, 25 states have adopted some substantive form of the UTC, with three others having introduced it into the legislature for adoption.
The goal of the uniform law is to standardize the law of trusts to a greater extent, given their increased use as a substitute for the "last will and testament" as the primary estate planning mechanism for the affluent.Preface, UTC, p.1 Despite the uniform law, however, differences remain, as states still harbor rich differences in fiduciary law. Each state adopting the UTC has incorporated changes into their version of the Code, reflecting certain peculiar or long-standing exceptions in their own state's law that legislators intend to preserve.
Overview Trusts are essentially creatures of contract.E.g., John Langbein, "The Contractarian Basis of the Law of Trusts," 105 Yale L.J. 625 (1995). This is an American legal academic claim, i.e., one which is not necessarily endorsed by many American practitioners. The proposition is also almost universally rejected in the rest of the common law world and has been refuted by several Commonwealth scholars. For a summary of the reasons why, see, e.g., Ming Wai Lau, The Economic Structure of Trusts: Towards a Property-Based Approach 25-6 (OUP 2011). Virtually all trusts are made in written form, either through an inter vivos or "living trust" instrument (created while the settlor is living) or in a will (which creates a testamentary trust). Therefore, in understanding certain terms in a trust, general rules of construction regarding interpretation of wills or other testamentary documents will apply.UTC Section 112. Subject to certain fundamental requirements of trusts,UTC Section 105(b). the UTC generally states that the terms of a trust instrument, as written by the settlor, will control over the "default rules" of the UTC. Where a document does not contain a provision that is otherwise covered by the UTC's default rules, the UTC will control.UTC Section 105(a).
Where a document contains obnoxious, unworkable, impractical, or outdated language, the beneficiaries and trustees have recourse to local courts having general jurisdiction in equitymost commonly for a declaratory judgment, judicial construction or reformation of the trust to bring it into compliance with the original intent of the settlor.See UTC Sections 411-416. Also, the court may be called upon to deal with circumstances not imaginable by the settlor at the time the trust was created to make the trust cy pres or as close as possible to the original intent.See UTC Section 413; Restatement Third of Trusts Section 67 (for charitable trusts); UTC Section 412 (for non-charitable trusts).
Trusts are a special breed of contract in that they often govern the disposition of property in the same way a "last will and testament" does via a probate proceeding. Many states differ as to their procedures concerning the interpretation and administration of trusts created during life (i.e., the inter vivos trust) versus those created in a will which are typically subject to jurisdiction in probate proceedings (the testamentary trust). The UTC attempts to standardize the general composition of both trust forms and their requirements, but does not generally attempt to address the procedural questions as to overall subject-matter jurisdiction and other aspects of proceedings involving trusts.See UTC Section 203 (optional section proposed by Committee). Instead, the vagarities of various state and local procedural rules will generally apply.
When titling property or otherwise referring to an existing trust, practitioners persist in referring to trusts as "Tr. u/a" (trusts under agreement, i.e., inter vivos trusts) or "Tr. u/w" (trusts under will, i.e., testamentary trusts). Industry convention is for the settlor's name to appear in the title. In the US, the name follows a shorthand for the type of instrument. Hence: "Tr. u/a John Smith FBO Alma Smith" or, if appropriate, "Tr. u/a John Smith FBO Alma Smith irrevocable" (FBO means for benefit of). Titles also frequently include more information such as the existence of more than one trustee ("Co-tr. u/a John Smith": "co-tr" means co-trustee) or that one or more of the trustees are not the original trustee (Successor Co-Tr. u/a John Smith).
In understanding American trust law, it is helpful to understanding the terminology and definitions of various terms as they relate to trusts. The following section contains a discussion of some of these terms.
Types of trusts There are numerous variations of trusts that exist in the United States. Listed below are some of the more common examples of trusts that are formed. Type of TrustDefinition and PurposeTax BenefitsRevocableA trust that can be modified or dissolved without the permission of the beneficiary. During the life of the trust, income from the corpus is distributed to the grantor. Transfer of assets to beneficiaries only occurs at the time of the grantor's death. Typically, the purpose of this type of trust is to help a decedent's estate avoid the probate process.None. Tax issues generally proceed as if no trust had been created in the first place.IrrevocableA trust that cannot be modified or dissolved without the consent of the beneficiary. The grantor effectively relinquishes all rights to any assets put into the trust.Assets are removed from the grantor's taxable estate. The grantor is also relieved of any tax liability from income generated by assets that are placed into the trust. In some jurisdictions, this rule does not apply if the grantor also serves as the trustee.Qualified Terminable Interest Property (QTIP)A trust designed to allow an individual to provide for their surviving spouse after their death. It allows for the grantor to determine how assets are disbursed after the time of death.Allows marital deduction to be taken advantage of.Special Needs TrustA trust designed to provide for the care of someone who has a disability or is otherwise unable to care for themselves.Can help in the avoidance of estate tax and ease the transfer of assets at the time of the death.Blind TrustBlind trusts are designed so that the beneficiary cannot control the management of, or see the value of the corpus within the trust. Often, in the case of public servants, or other individuals with notable fiduciary responsibility, assets are placed into a blind trust wherein they are the grantor and the beneficiary so their decisions are not affected by their personal wealth. The trustee is generally responsible for the management of the assets within the trust.No tax benefits are typically experienced with a blind trust.Testamentary TrustA trust created within a will. Such a trust normally only is established upon the death of the grantor, provided that the will or codicil providing for the creation of such trust is valid at the time of the decedent's death.Tax benefits vary based upon the type of trust created within the will.
The "three characters" in the play A trust generally involves three "persons" in its creation and administration: (A) a settlor or grantor who creates the trust;"Settlor" is the English term for the creator of a trust, while "grantor" is the conventional American term. The two are interchangeable; however, since this article discusses United States trust law, "grantor" is generally employed. (B) a trustee who administers and manages the trust and its assets; and (C) a beneficiary who receives the benefit of the administered property in the trust. In many instances where a revocable living trust is involved, one person can serve as grantor, trustee and beneficiary simultaneously until they die. In many other instances, especially after the death of the initial grantor, there will be different persons named to be trustee(s) or beneficiary(ies). There can be more than one of any of these "persons" in a trust at any one time.
The settlor/grantor Strictly speaking, the Grantor of a trust is merely the person creating the trust,This article generally discusses personal trusts for individuals, as opposed to institutional trusts created by corporations, typically by or on behalf of foundations, endowments, and defined benefit or other qualified pension plans. An institution can be the grantor for an institutional trust as well, but this article's focus is on the use of trusts for individuals. usually by executing a trust agreement which details the terms and conditions of the trust. Such a trust can be revocable or irrevocable. A revocable trust is one in which the settlor retains the ability to alter, change or even revoke the trust at any time and remove funds from it at any time. It is sometimes also referred to as a grantor trust. See below. Unlike under older common law rules, the Uniform Trust Code presumes that all trusts are revocable unless the terms of the trust specifically state otherwise.UTC Section 602(a) & comment to Section 602. Generally, the Grantor is also the one charged with funding the initial assets into the trust, either through an instrument (i.e., deed, security certificates, accounts retitled into the trust's name) or by a declaration (i.e., for tangible personal property without a formal title).
From both a historical and practical perspective, trusts have generally been designed to have only one grantor. This is due to the complications that can arise, particularly in non-community property jurisdictions, in determining the nature of property deposited into the trust and the proportionality of the multiple grantors' contributions within it.See UTC Section 602, comment, p. 96. However, a growing trend for husbands and wives is to create "joint trusts" where both are "grantors" of the trust, thus mirroring the familiar concept of joint tenancy ownership.Id.
For a revocable trust, the grantor retains the power to direct transactions for the trust, even if a third party serves as the trustee.UTC Section 808(a). This may even include situations where there may be a conflict in the grantor's direction and the actual terms of the trust. In an irrevocable trust, there has developed a growing use of a so-called trust protector. This is generally an unaffiliated, third party (often a lawyer or an accountant) who is granted the power to amend or change the terms of the trust in order to accommodate unexpected changes in tax or fiduciary law, unexpected changes in the trust's circumstances or other contingencies. The Code permits the use of such third parties to amend or alter even an irrevocable trust.UTC Section 808, comment, p.135. The trustee is to act in accordance with such powers unless "the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust."UTC Section 808(b). Furthermore, the Code assumes such trust protectors act in a fiduciary capacity and must act in good faith with respect the trust's purposes and the best interests of the beneficiaries.UTC Section 808(d).