10.2 Trusts

A trust is a fiduciary relationship in which one person holds property for the benefit of another. Its defining feature is the split of title: the trustee holds legal title (management and control), while the beneficiary holds equitable title (the right to enjoy the property). Because of that split, the same person cannot be sole trustee and sole beneficiary — the titles would merge and the trust would collapse.

Trust Parties and Creation

• Settlor (also grantor or trustor) — creates the trust and supplies the property.
• Trustee — an individual or corporate fiduciary who administers the trust under its terms.
• Beneficiary — the person (or charity) for whose benefit the trust exists.

A valid private express trust requires: (1) the settlor's present intent to create a trust, (2) identifiable trust property (the res or corpus), (3) an ascertainable beneficiary, and (4) a lawful purpose. Precatory language ('I hope my son will use the funds for college') expresses a wish, not an enforceable trust — a classic exam trap.

Classifications

Revocable living trusts are probate-avoidance tools, full stop. Because the settlor retains the power to revoke, the assets remain reachable by the settlor's creditors, remain in the settlor's taxable estate, and remain taxable to the settlor for income tax (a grantor trust). Anyone who promises that a revocable trust shields assets or saves estate taxes is selling snake oil. Irrevocable trusts do the opposite: by surrendering control, the settlor may remove appreciating assets from the taxable estate and protect them from future creditors — at the price of losing access and triggering possible gift tax on the transfer.

Special Needs and Spendthrift Trusts

A special needs trust (supplemental needs trust) holds assets for a person with a disability without counting those assets against the strict resource limits of means-tested public benefits — Supplemental Security Income (SSI) and Medicaid. The trustee may pay for supplemental quality-of-life items (therapies, travel, electronics) but generally not food or shelter, which would reduce SSI. A third-party special needs trust (funded by a parent or grandparent) has no payback requirement; a first-party trust (funded with the disabled person's own money, such as a settlement) must reimburse Medicaid at death and must be established before the beneficiary turns 65.

A spendthrift trust contains a restraint on alienation: the beneficiary cannot voluntarily assign his interest, and creditors cannot reach it before distribution. Recognized exceptions — claims that pierce the restraint — typically include child support and alimony, government claims (taxes), and providers of necessaries.

Trustee Fiduciary Duties

The trustee is held to the highest fiduciary standard in the law:

• Duty of loyalty — administer solely in the beneficiaries' interest. Self-dealing is prohibited even if the deal is fair and the trust profits; the transaction is voidable at the beneficiaries' option (the 'no further inquiry' rule).
• Duty of prudence — the Uniform Prudent Investor Act (UPIA) judges investments as part of an overall portfolio under modern portfolio theory and ordinarily requires diversification; no single investment is per se imprudent.
• Duty of impartiality — balance the competing interests of income beneficiaries and remaindermen.
• Duty to inform and account — the Uniform Trust Code (UTC) requires keeping beneficiaries reasonably informed and providing regular accountings.
• Duty to collect and earmark — marshal trust property, keep it separate from personal assets, and title it in the trust's name.

Remedies for breach include surcharge (personal liability for losses), removal of the trustee, and tracing into wrongfully disposed assets.

Other Trusts Worth Knowing

• QTIP trust (Qualified Terminable Interest Property) — gives the surviving spouse all income for life while the first spouse to die controls where the principal goes at the survivor's death; qualifies for the marital deduction by election. Common in blended families.
• Irrevocable life insurance trust (ILIT) — owns a life insurance policy so the death benefit stays out of the insured's taxable estate.
• Charitable remainder trust — pays the settlor income for life or a term, then passes the remainder to charity, generating an income-tax deduction and deferring capital gains.
• Trust for a minor / discretionary trust — holds a child's inheritance with trustee discretion over distributions instead of an outright gift at 18.

Trust Funding and Pour-Over Wills

A trust is an empty bucket until funded — the paralegal's retitling work (deeds into the trust, changed brokerage account registrations, updated beneficiary designations) is what makes the plan function. An unfunded trust sends every asset right back through probate. The pour-over will is the safety net: it devises the residuary estate to the already-existing trust, so overlooked assets end up governed by the trust terms. Exam trap: the pour-over will does not avoid probate — those assets pass through probate first and only then 'pour over.'

Paralegal scenario: A client signs a beautifully drafted revocable trust but never retitles his $800,000 brokerage account. At death, that account is not trust property; it passes under the pour-over will through probate. The intake-to-funding checklist exists precisely to prevent this.