A trust is created whenever a donor gives assets to another, called the trustee, for later delivery to beneficiaries. The trustee has legal title to the property in the trust and the beneficiaries have equitable title. When a trust disposes of its last assets, it naturally terminates.
Section 401 of the Uniform Trust Code states that a trust can be created by:
- transfer of property to a trustee either during the settlor's lifetime or by will or other disposition triggered by the settlor's death;
- declaration by the property owner that he holds the identified property as trustee; or
- exercise of a power of appointment appointing the property to a trustee.
It's not hard to create a trust. Here are the words that established the testamentary trust that awards the Nobel Prizes every year:
"The whole of my remaining realizable estate shall be dealt with in the following way: the capital, invested in safe securities by my executors, shall constitute a fund, the interest on which shall be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind. The said interest shall be divided into five equal parts, which shall be apportioned as follows: one part to the person who shall have made the most important discovery or invention within the field of physics; one part to the person who shall have made the most important chemical discovery or improvement; one part to the person who shall have made the most important discovery within the domain of physiology or medicine; one part to the person who shall have produced in the field of literature the most outstanding work in an ideal direction; and one part to the person who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses. The prizes for physics and chemistry shall be awarded by the Swedish Academy of Sciences; that for physiological or medical work by the Caroline Institute in Stockholm; that for literature by the Academy in Stockholm, and that for champions of peace by a committee of five persons to be elected by the Norwegian Storting. It is my express wish that in awarding the prizes no consideration whatever shall be given to the nationality of the candidates, but that the most worthy shall receive the prize, whether he be a Scandinavian or not."
— from the Full Text of Alfred Nobel's Will
There are 4 legal requirements for creating a trust:
- the donor must have capacity to create a trust;
- the donor intended to create a trust;
- the trust has funding;
- the trust has ascertainable beneficiaries.
As a practical matter, the trustee can be a beneficiary, but not the sole beneficiary; otherwise the trust would serve no function, as the role of trustee and beneficiary would merge. Section 402(a)(4) of the Uniform Trust Code (UTC) also adds that a trustee should have duties to perform. However, this requirement could be subsumed under the definition of a trust, since, by definition, property is put in a trust for later delivery to a beneficiary, which is performed by the trustee.
If the trust contains real property, then the Statute of Frauds requires that the trust be in writing. The Wills Act also requires that a testamentary trust, which is created by a will, be in writing.
A donor must have mental capacity to create a trust if the trust is a living trust (aka inter vivos trust) and testamentary capacity to create a testamentary trust that is created by the donor's will.
Transferring property through a trust is much like giving a gift and has similar requirements: there must be an intent to give a gift and the donee must accept delivery of the gift. If the gift is not deliverable, then either constructive delivery, which is delivering an item that gives the recipient control over the gift so that she can take it, such as the keys to a car or the delivery of a document with the list of items in the gift, or there can be a symbolic delivery, which is delivering something that stands for the gift, such as a deed for property. However, if a trust was intended, then the gift is given in trust rather than directly to the beneficiary.
Intent to Create a Trust
A trust is created whenever someone gives a gift to an intermediary, called the trustee, for later delivery to a beneficiary. Since no specific terms are required to create a trust, there must be a clear intent to create a trust. Sometimes there is a question of whether the creation of a trust was intended, but the use of such terms as trust or referring to the intermediary as a trustee is a strong indication that the creation of a trust was intended.
However, precatory words are not sufficient to establish a trust, but express only a wish, hope, or other entreaty to do something. For instance, you give money to your son and say that you hope that he uses the money for your granddaughter's education. Often, such a gift is called a precatory trust, but, legally, is not considered trust but a direct gift to the purported trustee. The intended beneficiary has no property interest in the gift and the trustee can keep the gift if he pleases. A trust may be created, however, in spite of precatory words if other evidence clearly establishes intent. Greer vs. Bruck, Iowa (2004)
Sometimes the donor meant to give a gift, but fails to deliver the gift. If the failure to deliver is because the donor has died, the donee will sometimes try to argue that instead of a failed gift, the donor meant to create a trust with the donee as trustee. Most jurisdictions reject trying to recharacterize a failed gift as a trust.
However, if the donee relied upon the gift to her detriment, such as performing services for the donor in exchange for the gift, then courts may impose a constructive trust to prevent the unjust enrichment of the donor, by forcing the donor to give the gift. In some jurisdictions, a constructive trust may be imposed to transfer a failed gift to the donee if the donee is a descendant of the donor.
A Trust is Created when it Receives Funding — Deed and Declaration of Trust
A trust is not created until the donor, as settlor, transfers property to the trust. Hence, if a donor promises to give a gift in the future, then no trust is created, but rather a gratuitous promise to give a gift in the future. The donor is not legally obliged to deliver the gift, so the donee has no property interest in the gift.
A trust can be created either by a deed of trust or a declaration of trust. A deed of trust can be transferred to a 3rd party trustee, who then receives legal title to the property transferred by the settlor. The trust property (aka trust corpus, trust principal) is listed in the deed. If the settlor is also trustee, which is true for most living trusts, then a declaration of trust is all that is necessary to transfer personal untitled property to the trust if the declaration of trust refers to it.
Although a declaration of trust does not have to be written, there may be evidentiary problems in proving that a trust existed or what property belonged to the trust. However, trust property may be recognized by its segregation from the settlor's property since one of the duties of the trustee is to keep trust property separate from the trustee's personal property. If the trust contains real property, then the Statute of Frauds requires that the declaration of trust be in writing.
Although almost any type of property can be transferred to a trust to create it, promises, in the form of expectancies or future profits, are considered inadequate. However, the trust is created when the profits are realized if it is still the donor's intent to create the trust.
Except for Charitable and Honorary Trusts, Trust Beneficiaries Must Be Ascertainable
Most trusts require ascertainable beneficiaries: people who can be unambiguously identified so that the trustee knows to whom it owes fiduciary duties and which allows the courts to know who has legal standing to enforce the trust.
Beneficiaries are ascertainable if they are named or if there is an objective, or a formula or algorithm that allows the unambiguous determination of the individual beneficiaries, either when the trust is formed or at some later time. U.T.C. §402(b) Hence, the courts have upheld a trust for unborn children, even though the beneficiaries are not knowable at the trust's inception.
A power of appointment differs from a trust in that the holder of the power has complete discretion to transfer property to appointees as long as the appointees satisfy the terms set forth by the donor of the power; hence, an appointment holder owes no fiduciary duties to possible appointees.
If the trust has no ascertainable beneficiaries, but instead designates a class without specifying particular individuals, then some jurisdictions will automatically convert the trust into a power of appointment. However, most jurisdictions treat the attempted distribution as a failed trust, and distribute the property as if the trust never existed. Nonetheless, §402(c) of the Uniform Trust Code (UTC) specifies that a power can be granted to the trustee to select individuals from an indefinite class as long as the power is exercised within a reasonable time; otherwise, the property passes to the people who would have taken if the power was never conferred.
In Clark v. Campbell 82 N.H. 281, 133 A.166 (1926), the testator created a testamentary trust to bequeath his personal property to his friends. Since the court had no way to ascertain who the testator's friends were, the Supreme Court of New Hampshire ruled that the trust was unenforceable. However, if a class has an objective description, then the trust may be valid. Hence, a trust for one's relatives has been upheld, since states generally define who relatives are in their descent and distribution statutes.
Several types of trusts, because of their objective, do not require ascertainable beneficiaries. A charitable trust is established for the common good, and, therefore, its beneficiaries can be anyone that satisfies the trust's objectives. The testamentary trust established by Alfred Nobel is a charitable trust, and, thus, does not need ascertainable beneficiaries.
An honorary trust has no legal beneficiaries, but is set up for an objective, such as caring for a pet or to maintain a gravesite, for instance. An honorary trust is legal as long as the objectives are honorable and definite, and are not illegal. However, an honorary trust can only exist as long as the trustee is willing to carry out the terms of the trust. If the trustee does not, then the courts will impose a resulting trust — a trust created by operation of law — and the property would be distributed as if the honorary trust never existed. A resulting trust may also be imposed for any amounts in the trust that are not necessary for its objective.
An honorary trust cannot violate the Rule Against Perpetuities, which requires that the trust cannot exist for longer than 21 years, or some other length of time set by state statute. An honorary trust may fail if the terms of the trust do not limit its lifetime. However, some courts have allowed honorary trusts with indefinite lifetimes if the lifetime of the trust is limited to less than the perpetuity limit by the funds it contains.
Deed or Declaration of Trust Must be in Writing
If a trust holds real property, then the Statute of Frauds requires that the declaration of trust or deed of trust be in writing. Under common law, if real property is conveyed to a trustee based on an oral trust agreement, then the trust will fail, and the trustee will own the property outright.
However, to prevent unjust enrichment, the courts may impose a constructive trust, forcing the trustee to turn over the property to the intended beneficiary immediately. Courts will particularly be prone to impose a constructive trust if the trustee had a confidential relationship with the donor or the donor was unduly influenced, or if the transfer occurred because of fraud.
The Wills Act requires that a testamentary trust — a trust created by will — also be in writing. With evidence that the testator intended to create a trust but it was not in writing, then under common law, to prevent unjust enrichment of the trustee, the courts will impose a remedial trust — either a constructive or resulting trust — to transfer the property.
A secret trust is one where the testator made an oral agreement with a donee to transfer the property to another beneficiary. Nothing in the will alludes to the agreement. When there is extrinsic evidence that the gift was given in trust for another, the courts will impose a constructive trust, forcing the intended trustee to transfer the gift to the intended beneficiary.
A semi-secret trust is one where the words of the will clearly shows that the gift was given in trust for another, but the terms of the trust were not written. Here, courts treat the gift as a failed gift and impose a resulting trust on the donee, transferring the property either to the residual beneficiary of the will, or, if the donee received the residuary, then transferring the property according to the state's intestate distribution scheme. However, even with a semi-secret trust, giving the gift to the intended beneficiary would be more aligned with testamentary intent, and since the courts frequently proclaim testamentary intent as paramount, the modern trend is to give the gift to the intended beneficiary.