Trust Creation, Required Elements, and Types of Trusts

Trust Creation, Required Elements, and Types of Trusts

A trust is a fiduciary relationship with respect to property in which one person, the trustee, holds legal title for the benefit of another, the beneficiary, who holds equitable title. To create a valid private express trust the bar examiners look for five elements, and your essay should march through them in order. First, there must be a settlor (also called a trustor or grantor) who has the capacity to convey and a present intent to create a trust. The capacity required for an inter vivos trust is the same capacity required to make an inter vivos gift; for a testamentary trust it is testamentary capacity.

The intent must be a present intent to presently create the relationship — a promise to create a trust in the future is not enough unless supported by consideration. Second, there must be trust property, called the res or corpus. The res must be an existing interest in identifiable property; a mere expectancy (such as the hope of inheriting from a living person) cannot be the subject of a trust, and an unfunded inter vivos trust is generally a nullity because there is nothing for the trustee to hold.

Third, there must be one or more ascertainable beneficiaries who can enforce the trust against the trustee — equitable title must vest in someone. Fourth, there must be a trustee to hold legal title and carry the active duties of administration, although as we will see the absence of a named trustee will not defeat an otherwise valid trust. Fifth, the trust must have a lawful purpose; a trust formed for an illegal objective, or one that is contrary to public policy or calls for the commission of a crime or tort, fails.

When a problem hands you a trust, recite and apply each element; the examiners reward candidates who spot which element is in jeopardy and analyze it rather than reciting boilerplate.

The single most heavily tested element is intent, because the line between a binding trust and a mere moral request is razor-thin in the fact patterns. The settlor must manifest an intent that legal and equitable title be split and that the holder of legal title be subject to enforceable, mandatory duties owed to the beneficiary. No particular words are required — the word 'trust' need not appear — but the language must impose a duty rather than express a hope.

Precatory expressions such as 'I wish,' 'I hope,' 'it is my desire,' 'I request,' or 'with the expectation that' are presumed not to create a trust; they suggest a moral or precatory obligation that the law will not enforce. That presumption can be overcome where surrounding circumstances show a true intent to bind: where the directions are detailed and specific, where the transferee is in a fiduciary relationship to the settlor, where the gift would otherwise be unnatural or leave a dependent unprovided for, or where the settlor used mandatory language elsewhere in the instrument. Intent must also be presently effective.

A statement that 'I intend to create a trust next year' is a gratuitous promise, unenforceable for want of consideration. By contrast, a settlor who today declares 'I hold this stock as trustee for my daughter' has split title now and created a trust now. Watch for the deathbed gift or the letter to a friend asking that the friend 'take care of' someone — these test whether the words rise to a mandatory fiduciary duty or merely express a wish, and the resolution usually turns on specificity and context.

Although a trustee is one of the five elements, the lack of a named or willing trustee will not cause an otherwise valid trust to fail.

A trust is a relationship attached to property, not to any particular person; if the named trustee dies, resigns, refuses to serve, or is removed, a court of equity will appoint a successor, because 'equity will not let a trust fail for want of a trustee.' The only exception is where the settlor's intent was that the trust operate solely if the particular named individual served — for example, where the choice of trustee was so personal that the settlor would not have wanted the trust to continue with anyone else. The beneficiary element is treated more strictly.

A private express trust must have one or more definite beneficiaries who are ascertainable now or who will become ascertainable within the period of the Rule Against Perpetuities, so that someone holds equitable title and can enforce the trust. A trust 'for my friends' generally fails for indefiniteness because 'friends' has no objective, ascertainable meaning, whereas a trust 'for my children' is valid. California recognizes a limited statutory exception: an otherwise indefinite gift to a class described as 'relatives' or by power-of-appointment language may be salvaged, and a trust may name a class so long as its members are ascertainable.

A trust may also fail at the beneficiary stage if the same person is the sole trustee and the sole beneficiary, because legal and equitable title then merge and the fiduciary relationship collapses — there must be at least some separation of title for a trust to exist.

California Probate Code §15200 lists the methods of creating a trust: (a) a transfer of property to another as trustee during the settlor's lifetime or by will or other instrument taking effect on death; (b) a declaration by the owner that he holds the property as trustee; (c) an exercise of a power of appointment in favor of a trustee; or (d) an enforceable promise to create a trust.

An inter vivos trust takes effect during life and may be created either by declaration of trust, where the settlor names himself trustee and need not deliver the property to anyone else, or by transfer in trust to a third-party trustee, which requires delivery sufficient to place the res beyond the settlor's control. A testamentary trust is created in a validly executed will and arises only at the testator's death; its terms must satisfy the Statute of Wills, and a secret or semi-secret trust raises special problems resolved by constructive trust and extrinsic-evidence rules.

Beyond express trusts, the examiners expect you to know the implied trusts. A resulting trust arises by operation of law to carry out the settlor's probable intent — for instance, where an express trust fails or is fully performed but property remains, or where a purchase-money resulting trust is presumed when one person pays and title is taken in another's name.

A constructive trust is not a trust at all but an equitable remedy imposed to prevent unjust enrichment, typically where property was acquired through fraud, duress, undue influence, breach of fiduciary duty, or a wrongdoer's homicide; the constructive trustee's only duty is to convey the property to the rightful claimant. California also recognizes oral trusts of personal property, valid if proved by clear and convincing evidence under Probate Code §15207, while a trust of real property must satisfy the Statute of Frauds under §15206.

Key Rules Recap

• A valid private express trust requires five elements: (1) a settlor with capacity and present intent to create a trust, (2) trust property (the res), (3) a definite or ascertainable beneficiary, (4) a trustee, and (5) a lawful purpose.
• A trust will not fail merely because the named trustee dies, resigns, or refuses to serve — the court appoints a successor; the maxim is 'equity will not let a trust fail for want of a trustee.'
• Inter vivos trusts may be created by the settlor declaring himself trustee (declaration of trust) or by transfer to a third-party trustee; testamentary trusts are created in a will and arise on the testator's death.
• Precatory language ('I wish,' 'I hope,' 'request') generally does not create a trust — it must impose a mandatory, enforceable duty; mere expression of a hope is a moral, not legal, obligation.
• Under California Probate Code §15200–15211, a trust may be created by transfer, declaration, exercise of a power of appointment, or an enforceable promise, and an oral trust of personal property is valid if proved by clear and convincing evidence (Prob. Code §15207).