When a trust is established, the legal document that addresses the estate in the trust lists all parties to the trust. This document is known as the trust instrument. Parties that are involved in the execution of a trust include the grantor or settler, a trustee or trustees, a successor trustee or trustees, and any beneficiaries.
The grantor or settlor is the individual that initiates the creation of a trust. This title may also be applied to a couple if both people sign the trust instrument as a settlor. The settlor designates what property is to be contained in the trust and how it is to be managed.
Then the settlor appoints any trustees to be involved and beneficiaries of the estate listed in the trust instrument. In order for the trust to be drafted, the settlor must pay the fees for the drafting of the document and any fees to the trustees of the trust. A trust created in this manner is a living trust. If the trust is established through a last will and testament, the trust is known as a testamentary trust.
The person appointed to manage the estate listed in a trust is known as the trustee. Under Common Law, a trust is also known as a fiduciary. The settlor of the trust may appoint him or herself as a trustee. In this way, they continue to manage the trust and the estate during their lifetime. There may be more than one trustee selected to execute the trust at the time of the settlor’s death.
When this happens, the trust must specify how it is to be executed by the trustees whether it be having all trustees sign the trust for its execution or selecting a trustee to execute the trust if something should happen the the other trustee(s). A successor trustee is a title applied to trustees other than the settlor if the settlor is listed as a trustee.
If the trust is considered to be of a large or substantial amount, a bank or other financial institution can be appointed as a trustee by the settlor. The bank or financial institution must any and all records related to the maintenance of the trust.
These records include transactions, amendments, and any other changes made to the trust and estate listed in the trust. These records kept by the financial institution are supplied to beneficiaries after the settlor’s death or a court if subpoenaed.
The person or persons that receive the assets listed in a trust are known as beneficiaries. Beneficiaries only receive the estate of the settlor after the death of the settlor. Trustees distribute the estate among the noted beneficiaries based on the terms of the trust. If the settlor is also listed as the original beneficiary, all those that then receive assets are known as remainder beneficiaries.
The concept of a trust dates back to the
Crusades and beyond. An agreement to have someone else manage a property or estate
was a common practice among landowners worldwide. Historical evidence shows
that early forms of trust laws existed in Islamic communities and in Rome as
early as the 7th century.
In the medieval
Middle East, the concept of a trust was called a waqf. There were four parties
essential to the establishment of the waqf – a grantor (waqif), a trustee (mutawillis),
a beneficiary, and a judge (qadi).
The grantor initiates the trust with a trustee and the judge must approve of it
for it to be valid. Trusts operate in the same way in the United States. Just
like a modern day trust, the waqf ensured
that the trustee would manage an estate and later turn it over to listed
beneficiaries despite not having trust documents to establish the trust. These
trusts were created through a verbal agreement.
In Rome, a trust was
known as the fidei commissa. A fidei commissa was created to make
provisions for the transfer of property to lower the costs of owning that
property. By having someone else manage the property through this early form of
trusts, both the original owner and the trustee entered a financially
beneficial relationship though without formal trust documents.
There was an even earlier form of trusts
created through what is known as the Primogeniture system. This system
appointed the first born male child as the heir to all properties and assets of
the his parents. This heir is both trustee and beneficiary.
During the Crusades, trust law in
England was created through the feudal system and by Crusaders seeing the
benefits of the waqf in Islamic
societies. When a knight that owned land left for battle, he would often ask a
family member or friend to look after that land until his return. But as no
official legal precedents or trust documents were established for the return of
assets in trusts, the trustee could refuse to return the property. Since the
Crusader gave the property to the trustee to manage, courts would rule in favor
of the trustee. However, the original owner could appeal this matter through
the chancellor of that region under the feudal system. The chancellor, acting
as judge, could order the return of property if he saw fit. The trustee could
also return the property listing the original as a trustee or by making the
original owner a beneficiary of the estate.
As English law evolved and was
disseminated to the colonies, common law made trusts legally available for more
regions. Many jurisdictions in the United States continue to recognize English
common law as the standard for making decisions regarding the ownership and
management of trusts. Although this is the case for some states, the federal
government has drafted legislation that creates a rubric for states to create
their own trust laws and regulations and how trust documents are to be created.
The most recent form of this type of federal legislation is known as the
Uniform Trust code which was last amended in 2005.
The creation and administration of trusts drafted in the United States are
subject to the guidelines and limitations of legislation that addresses trusts
and trust laws. English common law was the original governing legal precedent
in regard to trusts and trust laws dating back to the Crusades of the 12th and
13th Centuries. Since then, considerable changes and safeguards have been
implemented to ensure the protection and authenticity of trusts that are
drafted. In the United States, many states create their own trust laws based on
the outlines and legislation provided by the federal government.
Such trust laws includes the Uniform Prudent Investor Act, the Uniform
Principal and Income Act, the Uniform Custodial Trust Act, the Uniform Probate
Code, and the Uniform Trust Code.
The Uniform Prudent Investor Act (UPIA), created in 1992, permits trustees
to manage the assets and investments of a trust through modern portfolio
management methods. Trustees are to manage the trust based on financial need,
tax status, investment potential, and potential risk.
The Principal and Income Act (UPAIA), created in 1997, presents outlines
and tasks for trustees to adhere to when administering the estate of a trust. Trusts
must provide evidence of receipts and payments in relation to the trust to the
beneficiaries. This act is intended to carry out the wishes and terms of the
grantor in the text of the trust instrument.
The Uniform Custodial Trust Act (UCTA), created in 1987, makes provisions
for an estate to be managed in a trust when the owner of the property has been
incapacitated. Incapacitation may be caused by a physical disability, mental
health issue, injury or death. Custodial trusts are simple trusts that declare
who is to manage the estate and give them the power to distribute the estate to
noted beneficiaries if the grantor does not recover from incapacitation.
The Uniform Probate Code (UPC), created from 1694 through 1969, displays
guidelines and methods to be used for courts to preside over Probate
proceedings. The UPC has eight that constitute the provisions made regarding
how Last Will and Testaments and trusts are to be decided upon in Probate
The Uniform Trust Code (UTC), created in 2000, presents guidelines and
regulations on the creation of trusts and how to determine if a trust is valid
in the eyes of the court. This code makes the creation of trust laws easier to
be drafted and implemented.
In addition to these codes and acts, federal tax laws also apply to trusts
and their management, which may affect the value of the trust when administered
to its beneficiaries.
Each of these acts and codes are not imposed at a federal level. States may choose
to adopt these codes and then alter them to coincide with other laws and
regulations within that state. States also reserve the right to not adopt these
codes at all. Each of these codes and acts were drafted by the National
Conference of Commissioners on Uniform State Laws (NCCUSL) to create uniformity
between fields of law and their application to states and their denizens.