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TRUSTS: WHAT ARE THEY, PART ONE If there is one device whose use above all others characterizes estate planning in Anglo-American jurisprudence it is surely the trust. In its many forms it can fairly be called ubiquitous. In this article we will try to strike up at least an initial acquaintanceship with this most useful creature of the law. In its essentials, a trust is an arrangement - normally among three different parties, although as we shall see, that is sometimes reduced to two and, occasionally, to one - whereby one person (known variously as the settlor, donor, grantor, trustor - the choice is yours) transfers property to a second person, the trustee, and the trustee agrees to hold that property, upon the terms dictated by the settlor, for the benefit of a third person, the beneficiary. Settlor to trustee for the benefit of beneficiary. The trustee is said to have bare legal title to the trust property, by which is meant that the property is his to administer, in accordance with well-settled rules of conduct, but not his to enjoy. The beneficiary, on the other hand, does not have legal title but only beneficial (or, as it is sometimes called, "equitable") title to the property, the right to enjoy the property or its fruits (dividends, interest, and so forth) in accordance with the terms of the trust. There may of course be more than one beneficiary, as in the case where a person sets up a trust for the benefit of his descendants and gives the trustee the authority to decide who gets what and what the criteria are to be for its decisions. By the same token, there may be more than one trustee. A typical combination is to pair up a trust company and a family member, the idea often being that the trust company will pull the laboring oar on investments and record-keeping but look to the individual for input on family factors. The great majority of trusts are in writing. They may be set up during a donor's lifetime by means of a trust agreement which is executed by him and the individual or corporation which is to act as trustee - or less commonly (and fraught with obvious legal problems, if indeed it's recognized as a trust) by oral agreement between the donor and the trustee. Trusts established during the donor's lifetime are known as "living" or, if you prefer a dead language, "inter-vivos" trusts. This should not be taken to mean that they necessarily end when the donor dies. Trusts which a donor provides for in his will are generally called testamentary or will trusts, and only become effective if and when his will is proven in the probate court. Another way of classifying trusts is with reference to their revocability ("revocable" trusts) or lack of it ("irrevocable" trusts). Thus, one might set up a revocable living trust, for example, or an irrevocable testamentary trust. Trusts established by a donor's will are obviously irrevocable, at least by the donor (although the will might very well give someone else the power to terminate the trust). Primarily for tax reasons, which are beyond the scope of this article, an individual may decide to create an irrevocable trust while still alive. Here are some examples of trusts to illustrate the foregoing discussion: Michael wishes to make provision for an elderly and impoverished relative and transfers a sum of money to his bank's trust department to carry out this objective. He and the bank enter into an agreement which, for example, directs the bank as trustee to pay all of the income from the trust (which the bank, of course, is charged with investing and for which it will be entitled to recover an annual fee generally based on the value of the trust) to Michael's relative and also to dip into the capital or principal of the trust if the income is insufficient. The trust will probably, but does not have to, be irrevocable at least during the relative's lifetime. At the relative's death the trust may terminate or, perhaps, go on for someone else's benefit. Henrietta has 10 nephews and nieces and wants to remember them at her death. She opens 10 separate savings accounts in her name as trustee, each one for the benefit of a named niece or nephew. In this instance the donor and the trustee are one and the same person. Each trust is an example of a revocable living trust because until Henrietta dies she may revoke the trust and take back the money. If she does not do this, the trust becomes complete at her death and goes to the named nephew or niece outright as nonprobate property. Such trusts (known familiarly as "Totten" trusts after a leading New York case involving someone of that name) do not require an agreement (beyond the paperwork required for the opening of the account). For death-tax purposes, it should be added, Totten trusts are treated as part of the deceased's estate. Hans wishes to make a gift to his alma mater but does not wish to completely part company with the subject matter of the gift during his life. He sets up an irrevocable living trust under which the trustee is directed to pay Hans a specified amount for life and then at Hans's death to give the property to his alma mater in his memory. Here Hans is both donor and one of the beneficiaries, his alma mater (the "remainderman") being the other. It is not uncommon for the remainderman-institution to act as trustee during the donor-life beneficiary's lifetime. Such trusts, known as "charitable remainder trusts" are subject to rather complex tax rules and should be approached with respectful caution. In Vermont, as in many other states, a testamentary trust remains subject to ongoing probate court jurisdiction. The trustee owes his appointment to a decree of the court and must file an annual account of his transactions during the preceding year. If he wishes to resign or if it becomes necessary for that or any other reason to obtain the appointment of a successor trustee, there must be an application to the court and another decree. If the testator has indicated in his will who he wants to act as successor, that individual or corporation will normally be appointed, at least if there are no substantive objections. In the case of a living trust, court intervention in the appointment of successor trustees - or indeed, in any other aspect of the trusts administration - is normally unnecessary. The conduct of trustees is subject to well-established rules - designed for the most part to protect the interests of beneficiaries and enforceable by legal action if violated. These relate both to positive acts of wrongdoing (borrowing trust funds for personal purposes, for example) and those of misfeasance (in the handling of trust assets or failure to file tax returns would be two misfeasance situations). The ultimate sanctions are true removal of the trustee and his surcharge to make the beneficiaries financially whole. This article is continued later. The complete list of Christopher Stoneman articles is:
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