15.4 Trusts

The PCCE tests trusts as a labeling skill. Name the players, say whether the trust is alive or born at death, say whether the settlor can still revoke it, and say what funding actually does. This is federal-and-general teaching. State trust codes vary (many follow the Uniform Trust Code in part). Do not invent one national trust statute.

The four nouns

A private express trust is a fiduciary relationship in which one person holds legal title to property for the benefit of another.

• The settlor (also grantor or trustor) creates the trust and contributes property.
• The trustee holds legal title and manages the property. A trust will not fail for want of a trustee; the court can appoint one. The settlor may be the initial trustee of a living trust.
• The beneficiary holds equitable title and receives the benefit. There may be current and remainder beneficiaries.
• The res (also corpus or principal) is the trust property. A trust generally cannot exist without some property, even a nominal dollar, plus a mechanism to add more. An empty set of recitals is not a funded trust.

Merger is the exam trap when the sole trustee and the sole beneficiary are the same person with no remainder interest — legal and equitable title reunite and the trust ends. A typical revocable living trust names the settlor as trustee and lifetime beneficiary and names remainder beneficiaries (or a pour-over path). That remainder usually prevents merger.

A trust must have a lawful purpose and beneficiaries who are definite enough to enforce it (or a recognized charitable purpose). Honorary trusts for pets exist in many modern statutes; treat them as a statute-specific exception, not as proof that any purpose will do.

Inter vivos versus testamentary; revocable versus irrevocable

An inter vivos (living) trust is created during the settlor's life by a trust instrument and a transfer of property (or a declaration that the settlor now holds identified property as trustee).

A testamentary trust is created by will. It does not exist until the will is admitted and the estate is administered. The personal representative funds it from probate assets. Testamentary trusts are public in the probate file. Living trusts are generally more private.

A revocable living trust lets the settlor amend or revoke while competent (and, if the instrument allows, through an agent). During the settlor's life the settlor usually keeps the beneficial enjoyment. At the settlor's death the trust typically becomes irrevocable and the successor trustee distributes or continues the trust according to its terms — without a second probate of those already-titled assets.

An irrevocable trust generally cannot be amended or revoked except as the instrument or a statute (decanting, nonjudicial settlement, court modification) allows. People use irrevocable trusts for tax, asset-protection, or special-needs reasons. Do not call every living trust irrevocable. The default under modern UTC-style law is that an inter vivos trust is revocable unless it says otherwise — older common law presumed the opposite. If the stem quotes an instrument, read the revocation clause.

Pour-over wills

A pour-over will is a will that leaves the residue of the probate estate to the trustee of an identified living trust. It is a safety net for assets the settlor never retitled. It is not a substitute for funding. Property that is still in the decedent's sole name still goes through probate and then pours into the trust. Property already titled to the trustee never needs the will.

The pour-over gift is valid in jurisdictions that have adopted the Uniform Testamentary Additions to Trusts Act or an equivalent, even if the trust is amended after the will is signed. Know the concept: the will pours; the trust receives; funding still matters.

Fiduciary duties of the trustee

A trustee is a fiduciary. Core duties:

• Loyalty. No self-dealing. Do not buy trust property, borrow the res, or take an unapproved secret profit. The "no further inquiry" idea in many courts means a self-dealing transaction can be undone without proof of unfair price.
• Prudence / care. Invest and manage as a prudent investor would, considering the trust's purposes, distribution needs, and the portfolio as a whole (modern prudent-investor / UTC standard), not a single "legal list" of bonds unless the instrument or an old statute still says so.
• Impartiality. Do not favor the income beneficiary over the remainder beneficiary, or the reverse, unless the instrument directs a unitrust or similar total-return approach.
• Account and inform. Keep records, provide reports the statute or instrument requires, and not commingle trust property with the trustee's own.
• Follow the terms and the law. A trustee may have discretion, but discretion is still fiduciary.

A successor trustee steps in on death, resignation, removal, or incapacity as the instrument provides. The paralegal calendars accountings, tax filings, and distribution dates; the attorney advises on whether a proposed action is a breach.

Spendthrift and special-needs trusts

A spendthrift clause restrains the beneficiary from voluntarily assigning the interest and restrains most creditors from attaching it before the trustee distributes. It is a creditor-protection device for the beneficiary, not a license for the trustee to ignore the terms. Common exceptions — states vary — include child support, sometimes necessities, and certain government claims. A settlor generally cannot spendthrift-protect the settlor's own revocable-trust interest from the settlor's creditors.

A special needs (supplemental needs) trust is drafted so distributions supplement, and do not replace, means-tested public benefits (SSI, Medicaid). Conceptually:

• A third-party special-needs trust is funded with someone else's money (a parent's) and typically needs no Medicaid payback clause.
• A first-party (self-settled) special-needs trust is funded with the beneficiary's own money (a personal-injury recovery) and, under federal benefits rules, often must include a payback to Medicaid at death.

Do not treat a special-needs trust as an ordinary support trust that pays every bill. The drafting lawyer, not the paralegal, chooses the structure. The exam wants the purpose: preserve eligibility by supplementing, not supplanting, benefits.

Constructive and resulting trusts — remedies, not planning booklets

A constructive trust is an equitable remedy. The court declares the legal title holder to be a trustee in order to prevent unjust enrichment after fraud, a slayer situation, a broken confidential-relationship promise, or a similar wrong. Nobody "signs up" for a constructive trust at an estate-planning conference.

A resulting trust is implied by law when an express trust fails (purpose becomes impossible and no alternative is stated) or, in some jurisdictions, when A pays the purchase price and title is taken in B's name (purchase-money resulting trust) without a gift intent. Again, it is a remedy or an implied relationship, not a revocable-living-trust package.

Probate avoidance is not estate-tax avoidance

A funded revocable living trust generally avoids probate of the assets titled in the trustee's name. Those assets are not in the decedent's probate estate. They remain in the settlor's taxable estate for federal estate-tax purposes because the settlor kept the power to revoke and the enjoyment of the property. Revocable-trust planning is a probate and privacy tool, not, by itself, an estate-tax shelter. Irrevocable trusts may have tax effects; those effects depend on what powers the settlor kept. Do not tell a client that "the living trust eliminates estate tax."

The paralegal's funding checklist

Signing the trust instrument does not retitle the house. After the attorney's instructions, a typical funding list includes:

1. Deeds. Prepare and record a deed from the settlor to the trustee (or to the settlor "as trustee of the [Name] Trust dated…"). Check homestead, title-insurance, and mortgage due-on-sale issues with the attorney.
2. Bank and brokerage accounts. Retitle to the trustee or add a POD/TOD to the trust, as counsel directs.
3. Closely held interests. Assign LLC membership or stock as the operating agreement and securities law allow.
4. Tangible personal property. Use an assignment of household contents if the attorney uses one.
5. Beneficiary designations. Coordinate life insurance and retirement accounts. Retirement assets have tax rules; do not blindly retitle an IRA without the attorney and a tax advisor.
6. Follow-up. Keep a funding chart. Unfunded assets are the pour-over will's problem — and the probate court's.

Worked path. Client signs a revocable living trust, names herself trustee, and names her children as remainder beneficiaries. She never records a deed. At death the house is still in her sole name. The house is a probate asset. If her pour-over will is valid, the lot will pass through probate and then into the trust. If she had recorded the deed, the successor trustee could sell or distribute without probate of that parcel. Either way, the house is still in her taxable estate if the trust was revocable.

Trap. "The trustee owns the property outright and may spend it as personal money" ignores fiduciary duty. "An empty trust booklet avoids probate" ignores funding. "Constructive trust" is not a planning product. "Revocable trust eliminates estate tax" is the classic wrong statement.

Term-swap. Settlor creates. Trustee manages. Beneficiary enjoys. Res is the property. Pour-over is the will that fills the trust. Spendthrift blocks most beneficiary creditors. Special needs supplements benefits. Constructive / resulting are court-implied remedies.