People often hear about trusts, but don’t really know how they work. Here are some basic principles.

The classic trust express setup

A trust is a relationship based on an agreement. Basically, there are three main positions in an established trust: the “grantor”, who is the person who creates the trust and places an asset in the trust; the “trustee”, who is the person who has title to the asset and actually carries out the trust; and the “beneficiary”, who is the person for whom the trust is created.

Therefore, a trust is essentially a way of holding an asset where title to the asset is held in the name of one person (i.e. the name of the trustee) for the benefit of another person (i.e. the beneficiary).

The trustee

The trustee occupies a “fiduciary” role with respect to that of the trust, both the current beneficiaries and the “carry-overs” who would receive the trust assets after the death of those entitled to income or principal now. As a trustee, the trustee has a very high standard, including the duty of honesty, the duty to scrupulously work for the best interests of the beneficiaries and avoid conflicts of interest and self-negotiation; Needless to say, this generally means that the trustee must pay more attention to the trust’s investments and disbursements than to the trustee’s own personal accounts.

The trustee is generally considered subject to a standard called the “prudent investor rule.” This is generally said to mean taking steps to obtain a reasonable return on investment while ensuring that you preserve capital. Investments must therefore be prudent or relatively conservative, which means that fiduciary assets cannot be placed in speculative or risky investments. In addition, investments must take into account the interests of current and future beneficiaries.

The trustee must maintain detailed and accurate records of all investments, income generated and paid, distributions made, and expenses of the trust. Generally, the trustee must report this information to the beneficiaries at some regular intervals.

While the trustee cannot, strictly speaking, delegate their responsibility or decision-making as a trustee, the functions of the trustee may be delegated to professionals to provide advice and assist with required tasks. For example, the trustee may hire financial advisers to make investments, accountants to handle the trust’s taxes and accounting, and attorneys to advise on legal issues and issues of interpretation.

The trustees have the right to charge reasonable fees for their services. For example, New York law establishes statutory commissions to serve as trustee (1). Family members often do not accept fees, although that may depend on the work involved in a particular case, the family member’s relationship, and whether the family member’s trustee has been chosen based on professional experience.

The beneficiary

The beneficiary can have practically all the benefits of the enjoyment of the property: the right to live in a house, the right to receive his income, etc. – without actually having the asset in the name of the beneficiary. This is very beneficial when the beneficiary is a minor or a person who needs to protect the asset from creditors. On the other hand, the beneficiary does not own the asset and cannot impose his wishes on how or when the asset will be used, invested or sold. The trustee, on the other hand, exercises a lot of control over the asset and, therefore, must be a person in whom the creator of the trust has a lot of confidence.

Different types of trusts

There are inter vivos trusts (or living trusts), which are effective while the grantor is alive. These can be revocable (meaning they can be modified or rescinded at any time) or irrevocable (meaning they generally cannot). There are also probate trusts that are included in a will, which take effect after death.

A classic trust setup is when title is held in the name of a parent or other adult for the benefit of a minor child. It is in this example that we can easily see both the benefits and the disadvantages of fiduciary ownership. A trust can also be used to prevent probate, to manage various assets, or to allow a beneficiary to receive government benefits even when they have received assets that were passed into a trust. A constructive trust can even be imposed by a court when it is clear that one person is acting as trustee and holds the title for the benefit of another, where an unfair outcome would otherwise occur.

Conclution

A trust can be a very useful and versatile tool. You can protect minors and other vulnerable people, avoid probate, and save taxes. A trust can even be imposed where appropriate to promote equity and enforce a verbal promise.

Disclaimer: This article is based on New York law and is for general information; It is not legal, tax or financial advice. Because the complexities and nuances of trusts and estate planning are enormous, you should consult an attorney with experience in these areas of the law to discuss your particular situation.

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(1) See New York Surrogate Court Practice Act (“SCPA”) § 2309.