One of the best ways to understand any technical article is to break down the article to its basic terms and then have an understanding of how those terms are used within the article in question. Only then will the reader gain a full and complete understanding of what he or she is reading.
To fully understand the subject of trusts, one must first have a working knowledge of the terms pertaining thereto. The following terms form a working knowledge for the average individual reader.
Trust Terms
Trust. The legal entity holding title to property of another.
Trustee. The name given to the person or entity given legal responsibility to carry out the terms and conditions of the trust.
Trustor. The name of the person or entity who creates the trust.
Trust Instrument. All the legal written documents that set forth the terms and conditions of the trust.
Trust Res. The subject matter of the trust. Usually property), it can be other things, such as duties (either alone or in combination with other instructions), etc.
Corporation or Corporate Trustee. A legal entity, other than an individual, set up by operation of law especially to administer trusts.
Living Trust. A trust set up by an individual to administer certain assets, usually those of the trustor, after his or her passing.
Revocable Trust. A trust that can be changed or even cancelled by the trustor during his or her lifetime.
Irrevocable Trust. A trust that cannot be changed or cancelled by the trustor as a general rule. There are some exceptions, however, such as by operation of law.
Operation of Law. This term means that a court having jurisdiction over trusts within a certain location has, upon motion of a moving party, issued a judicial decision affecting that individual trust, etc.
Form 1041. A form 1041 (U.S. income tax return for estates and trusts) is the form that all trusts must file with the Internal Revenue Service each year.
Form 541. This is a state of California tax form (California fiduciary income tax return) that must be filed with the Franchise Tax Board. All states have individual forms that must be filed for trusts that are created and are a matter of record within that state.
Recording Statutes. The rules (laws) pertaining to certain documents that may or are required to be recorded within that state (or county) to be of legal effect for certain purposes.
Who Should Act as a Trustee?
An oft-asked question is, "Who should act as the trustee of my living trust?" The answer depends to a large extent on the size of the assets within the living trust; the frequency of either additions or removables of assets from the living trust; and most importantly, the desires of the trustor (whether the trustor has any logical persons close to him/her that the trustor is comfortable with; whether the trustor is of sound mind to make intelligent decisions and so instruct the trustee of his/her wishes). There are logical guidelines to choosing a trustee, but no clear cut answer. It all depends on the facts pertaining to the situation.
Longevity
It should be remembered that individuals die; move; become disabled; lose interest; get involved in personality conflicts with members of the trustor's family; and so on. In addition, many family members or close friends may wish to assist when asked, but they really lack the knowledge and skills required to best serve the trustor's interest. Close friends and/or family members may also have a tendency to become emotionally involved with the trust and trustor such that they are unable to act in the best interests of the trustor, however well-intended.
Reports, Tax Returns, Etc.
Every formal trust requires certain amounts of paperwork each year the trust is in existence, as well as when the trust is terminated. For simple trusts, this may be done by the trustee. However, for more complex or involved trusts, the services of an accountant, professional tax preparer or attorney are usually required and well advised.
Supplemental Documents
It should be understood and remembered that a trustee can generally do only those things stated within the trust documents. If and when additional services are desired or required, it will usually be necessary to change the trust documents.
One very easy and common way to bypass this burdensome, potential problem is for the trustor to execute a simple power of attorney (usually a limited power of attorney, although it may also be a general power of attorney depending on the circumstances). By doing so, many potential problems associated with the usual living trust can be eliminated in advance.
Many living trusts and regular trusts have this feature already included within the original or supplemental documents, which helps eliminated any potential problems. Furthermore, the power of attorney may name an entirely different person than the trustee(s) named within the original living trust documents. Again, this depends on the individual circumstances.
Properly prepared, a living trust or other trust agreement is one of the most powerful and useful legal documents one a person can use for their present (and future) well-being. Improperly prepared, it can be a nightmare. Furthermore, everyone needs a will, just in case, for a variety of reasons.
Most importantly, remember that a living trust (or even a regular trust agreement) is merely a license to do something. Until executed, it is like a marriage license. Until the marriage ceremony, there is no marriage. A trust is executed by transferring title of property (both personal and real) into the name of trust and by no other way. When it comes to trusts, good intentions have little legal effect.
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