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A trust is a legal relationship that allows property to be held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor. Trustor, or Maker, who transfers property to a Trustee. The Trustee holds that property for the trust's beneficiaries. Almost any type of asset can be used to fund a trust and a trust can have multiple beneficiaries as well as different classes of beneficiaries.
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All trusts can be broadly divided into two categories – testamentary and living trusts. A testamentary trust is one that does not become active until the death of the Settlor, and which is typically triggered by a provision in the Settlor’s Last Will and Testament. A living trust, also referred to as an “inter vivos” trust, activates when all formalities of creation are complete, and the trust is funded. Living trusts can be further divided into revocable and irrevocable trusts. A revocable living trust can be revoked or terminated by the Settlor at any time and for any reason whereas an irrevocable living trust cannot be revoked or terminated by the Settlor for any reason.
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A trust is created using a document called a trust agreement. Within the trust agreement are the terms, created by the Settlor, that dictate how the trust will operate. The trust agreement also includes the overall trust purpose. Trust administration refers to the Trustee’s job of overseeing the terms of the trust which, in general, involves investing trust assets and distributing assets pursuant to those terms. The Trustee is legally obligated to abide by the trust terms unless a term is impossible, unconscionable, or illegal. Generally, the more complex and/or valuable the trust assets are, the more time-consuming and complicated it is to administer a trust.
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The Settlor appoints the Trustee when creating the trust agreement. The Settlor has almost unfettered discretion when choosing a Trustee which often leads to appointing the wrong person for the job. Instead of focusing on the duties of a Trustee, a Settlor often appoints a spouse, close friend, or family member to the position based solely on the trustworthiness of that person. While the Trustee certainly should be trustworthy, there is more to successfully administering a trust than just being trustworthy. Ideally, the individual should really have a legal background as well as some experience in finance given the types of duties the Trustee will have when administering the trust. In fact, for larger, more complex, trusts, it is often best to appoint a professional Trustee.
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Examples of some duties and responsibilities a Trustee may have while administering a trust include:
- Understanding and abiding by the terms of the trust agreement.
- Furthering the trust purpose as stated by the Settlor.
- Communicating with beneficiaries.
- Mediating conflicts among beneficiaries.
- Investing trust assets using the “prudent investor” standard.
- Managing trust assets.
- Distributing trust assets according to the trust terms.
- Making discretionary decisions, if applicable.
- Keeping trust records.
- Preparing, filing, and paying trust taxes.
- Defending the trust against legal challenges.
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The Trustee is responsible for administering the trust until he/she resigns, is removed by a judge, or until the trust terminates. The way a trust terminates depends, in part, on the type of trust. The Settlor of trust may, or may not, be able to terminate the trust. The trust terms may also grant the power to terminate the trust to the beneficiaries, to the Trustee, to a specific person, or to a combination of people. Likewise, the trust terms may set a date when the trust will terminate or include an event that triggers the termination of the trust. Finally, anyone involved in the trust may turn to a court to terminate the trust. A judge may order the termination of a trust for reasons such as the trust purpose has been achieved, the trust has insufficient assets left to warrant continuation, or everyone involved agrees that termination is in their best interest.
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Like all things legal, numerous problems could arise during the administration of a trust. Many of those problems cannot be foreseen; however, appointing the right Trustee can help prevent problems caused by the Trustee, such as:
- Conflicts of interest. If a conflict of interest arises between the Trustee and the trust purpose or between the Trustee and the beneficiaries, the trust could be irreversibly damaged.
- Failure to abide by the trust terms. Unless a term is illegal, impossible, or unconscionable, the Trustee is legally obligated to follow the terms as created by the Settlor. Failing or refusing to abide by the terms of the trust will almost certainly thwart the trust purpose as stated by the Settlor of the trust.
- Mismanaging the trust assets. A Trustee is in a fiduciary position, meaning that the Trustee must handle the trust assets with the utmost care. When investing trust assets, the “prudent investor standard” must be used by a Trustee. The prudent investor standard requires the Trustee to only invest in risk-averse options and to consider retention of the principal to be the most important consideration when making investments.
- Self-dealing. “Self-dealing” by a Trustee can do enormous damage to a trust. Self-dealing basically means that the Trustee cannot manage the trust assets or invest those assets with the intention, or goal, of benefiting himself/herself. This is not to say that a Trustee can never benefit from a trust. In fact, sometimes a Trustee is also a beneficiary of a trust; however, the Trustee cannot make decisions with his/her own self-interest at the heart of those decisions.
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Contact Us
If you have additional questions or concerns about contesting a Will or about preventing people from contesting your Will, contact an experienced Indianapolis, Indiana estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule your appointment today.
