Trusts

trusts

Trusts
The trust can trace its existence back to early English common law and the English courts of chancery. Originally the English jurisprudence system consisted of two separate courts, courts at law and at equity. The chancery courts were courts at equity that administered equitable relief to the plaintiff. Over the course of many years the trust has developed into a remarkably flexible document.

The genius behind the creation of a trust is the concept that one party, the trustee, holds title for the benefit of another party, the beneficiary. The concept has been further explained that the trustee holds the legal title and the beneficiaries hold the equitable title. The division of the legal and equitable titles forms the basis of many trust law decisions over the centuries.

Just as a key is necessary to start a car engine, the key to getting a trust started and running is the transfer of the title to the trustee. An inter vivos, or living trust, is an extremely popular and effective estate planning document and for many, forms the foundation of their estate plan.

The Living Trust Team
There are three separate positions on the living trust team and typically, the individual creating the living trust will initially serve in all three positions. The three positions on the trust team are the grantor, the trustee and the beneficiary.

The grantor is the individual who creates the trust and sets forth the instructions in the trust and determines who is to ultimately receive the assets upon the grantor’s passing. The trustee is the individual responsible for carrying out the terms contained in the trust. When a grantor creates a living trust, the grantor will name him or herself as the initial trustee. The grantor will also name a successor trustee to manage and distribute the assets upon the grantor’s disability or death. The successor trustee has a fiduciary responsibility to carry out the terms of the trust. The last position on the trust team is that of the beneficiary. The beneficiary is the individual who benefits from the assets in the trust. The grantor will also name him or herself as the initial beneficiary of the trust.

When an individual creates a living trust, the individual initially occupies all three positions; the individual creates the trust as the grantor, manages the trust assets as the trustee and is the initial beneficiary of the assets. Upon the grantor’s passing, the successor trustee assumes the responsibility for carrying out the terms of the trust and for transferring the assets of the trust to the ultimate beneficiaries pursuant to the terms set forth in the trust instrument.

The creation of a living trust and the transfer of assets into the trust do not result in a separate tax return being filed – all the income is still reported on the same IRS Form 1040. A living trust is revocable by the grantor and it can be changed or amended at any time, as long as the grantor has the requisite mental capacity required to amend the trust.

Some Reasons Why Living Trusts are So Effective
A living trust is an extremely flexible estate planning tool and be used for a number of reasons. Sometimes a living trust is used as a will substitute in order to avoid the expense and delay of probate. Unlike a will, a living trust is a private document. A will is a public document and a copy of it can usually be obtained from the local probate court. A trust, however, is a private document and is not typically filed with the probate court. If title to the asset has been transferred into a living trust, that asset would avoid the probate process upon the death of the grantor.

The key to making a trust work is the transfer of title of the assets to the trustee. When the grantor of the trust creates a trust and transfers the title of the assets to the trustee, upon the grantor’s passing, the successor trustee holds title on behalf of the beneficiaries and the assets titled in the trust do not have to pass through probate.

A living trust is an especially effective vehicle when an individual owns real estate in two different states. By transferring the title to the real estate in both states to the trustee, the grantor avoids probate in the state in which he or she resides, the domiciliary estate, as well as the state where the other property was owned, the ancillary estate.

Another common reason for using a living trust is to protect against a probate conservatorship proceeding upon the disability of the grantor. If an individual should have a stroke and become disabled and unable to manage his or her financial affairs, the assets in the trust can be managed by the successor trustee – not by a court appointed conservator. The assets are not owned in the grantor’s individual capacity, but rather, by the trustee, or successor trustee, of the grantor’s trust. Upon the grantor’s disability, the successor trustee assumes the trusteeship and manages the assets in the trust for the benefit of the grantor and consequently, the assets titled in trust can avoid the delay and expense of a court imposed conservatorship.

Another common reason for creating a living trust is to hold assets in the trust upon the grantor’s passing for the benefit of minor children or grandchildren. Creating a trust and choosing a successor trustee who will manage the assets for the minor children or grandchildren allows the grantor to provide for the beneficiaries’ college expenses, and their health, maintenance, support and the trust can also be drafted to provide for advanced educational degrees.

Additionally, by holding the assets in trust after the grantor’s passing and incorporating a spendthrift provision in the trust allows the assets in the trust to be protected against the beneficiaries’ creditors and their spendthrift propensities. Section 456.5-502 RSMO provides in part that a term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust,” is sufficient to restrain both the voluntary and involuntary transfers of the beneficiary’s interest.

As individuals age it is quite common for a parent to establish a living trust and name a son or daughter to serve as a co-initial trustee. The son or daughter named as a co-initial trustee will assist the parent with the management of the assets and the payment of the parent’s liabilities.

Missouri Uniform Trust Code (MUTC)
Missouri enacted its version of the Uniform Trust Code, known as the Missouri Uniform Trust Code (MUTC) on January 1, 2005, and it is contained in Sections 456.101 RSMO to 456.11-1106 RSMO. To create a valid trust under the MUTC, Section 456.4-402 provides in part that a trust is created only if: (1) the grantor has capacity to create a trust; (2) the grantor indicates an intention to create the trust; (3) the trust has a definite beneficiary or is: (a) a charitable trust; (b) a trust for the care of an animal or (c) a trust for a noncharitable purpose; (4) the trustee has duties to perform; and (5) the same person is not the sole trustee and sole beneficiary.
The MUTC sets forth the capacity requirement to create a trust at Section 456.6-601 RSMO which states that the capacity required to create, amend, revoke, or add property to a revocable trust, or to direct he actions of the trustee of a revocable trust, is the same as that required to make a will.

Capacity Required to Create a Revocable Trust
You will recall from my discussion of capacity under my Will tab that I discussed the capacity required to make a will in detail. In order to create a living trust in Missouri, the individual must possess the same testamentary capacity as that required to execute a will. In order to possess the necessary testamentary capacity in Missouri to execute a will, a person must be of sound and disposing mind and memory.

Missouri Approved Jury Instruction (MAI) 15.01 defines the phrase sound and disposing mind and memory. That phrase means that when a person signed the will that he or she was, first, able to understand the ordinary affairs of life, second, able to understand the nature and extent of his or her property, third, able to know the persons who were the natural objects of his or her bounty and, fourth, could intelligently weigh and appreciate the natural obligations to those persons.

The first requirement of MAI 15.01 requires the testator to understand the ordinary affairs of life is an inexact definition and open to many interpretations. It might mean that the person is oriented as to time and space. Some cases have discussed this factor and held that the individual executing the will needed to be able to understand the necessity of providing for the daily needs of life. It has also been interpreted as not being required to understand complicated business transactions. The testator must understand the nature of the transaction of executing a will. This is a basic requirement that the testator know he or she is signing a will. If the testator cannot understand that he or she is executing a will, then the testator lacks the necessary capacity to execute the will.

The second requirement of MAI 15.01 is that the testator must understand the nature and extent of his or her property. The testator needs to understand the nature and extent of his property so that he or she can determine who the beneficiaries of the will are and what each beneficiary should receive. This does not mean that the testator must have a perfect knowledge of the assets and liabilities in his or her estate. A general knowledge of the nature and extent of the property will suffice.

The third requirement of MAI 15.01 is that a testator must understand the natural objects of his bounty. The knowledge may be general in nature but clearly the testator should know the names and number of his or her children. Additionally, it is not unrealistic to expect that the testator know the name of his or her spouse, if any.

The last requirement of MAI 15.01 is that a testator must be able to intelligently weigh and appreciate the natural obligations to the objects of his or her bounty and understand the disposition of the property as set forth in the will. This requirement focuses on the disposition of the testator’s assets. The testator must have the required understanding of who the testator desires to name as beneficiaries of his or her estate plan.

As set forth in MAI 15.01, the testator must have satisfied all four requirements at the time of the execution of the will in order to be of sound and disposing mind and memory.

The grantor of a revocable living trust must satisfy all of the above requirements in order to meet the necessary capacity requirement to create a trust in Missouri.

Intention to Create a Trust
Typically, a grantor will execute a written document, known as the trust instrument, which sets forth the grantor’s instructions regarding the disposition of his or her assets upon the grantor’s disability or death. The trust instrument must be in writing if it holds real estate in order to comply with the Statute of Frauds. Section 456.8-801 RSMO requires that the trust be in writing and provides in part, that all declarations or creations of trust of any lands shall be manifested and proved by some writing signed by the party or by the party’s last will, in writing, or else they shall be void.

A Few Duties of Trustees
The grantor of a trust will set forth instructions in the trust instrument and when the grantor of the trust passes away, if the successor trustee accepts the trusteeship, he or she will be responsible for following the instructions contained in the document. A person named as a trustee in a trust instrument does not have to accept the office of trustee, the person named can decline to serve.

Duty to Administer the Trust
If the individual named in the trust instrument accepts the office of trustee, he or she will have an affirmative duty to act pursuant to the terms of the trust. Section 456.8-801 RSMO provides that upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries and in accordance with Sections 456.101 to 456.11-1106 RSMO.

The Uniform Trust Code comments to this section provide in part that a primary duty of a trustee is to follow the terms and purposes of the trust and do so in good faith. Additionally, Section 456.8-801 RSMO provides that the trustee must administer the trust in accordance with the terms and purposes of the trust, but the trustee must also comply with Missouri State law as set forth in the MUTC statutes.

While the trustee must follow the purposes and terms set forth in the trust instrument, a trustee is not required to follow a provision in the trust that the trustee knows would be unlawful or invalid because the provision would be contrary to public policy. Section 456.4-404 RSMO provides in part a trust may be created only to the extent its purposes are lawful, not contrary to public policy and possible to achieve.

Duty of Loyalty
One of the most fundamental duties of a trustee is the duty of loyalty. The duty of loyalty is well known and has been the subject of numerous books and various law school classes. The duty of loyalty has been fodder for many cases when a beneficiary of the trust has alleged that the trustee breached the duty of loyalty. Section 456.8-802 RSMO states in part that a trustee shall administer the trust solely in the interests of the beneficiaries.

As stated in the Uniform Trust Code comments to this section, a trustee owes a duty of loyalty to the beneficiaries, a principle which is sometimes expressed as the obligation of the trustee not to place the trustee’s own interests over those of the beneficiaries. The duty of loyalty is the foundation for the relationship that the trustee has with the beneficiaries.

Duty of Prudent Administration
Section 456.8-804 RSMO provides that a trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill and caution.  The duty of prudent administration requires that the trustee exercise “reasonable care, skill and caution” while serving as a trustee.

Duty to Give Personal Attention – When Delegation is Permitted
The fiduciary relationship between the trustee and the beneficiaries was classically defined as a personal relationship and non-delegable. The modern theory is that some powers of the administration of the trust may be delegated to an agent, provided however, that the trustee retains supervision over the agent. Section 456.8-807 RSMO provides in part, that a trustee may delegate to an agent duties and powers that a prudent trustee of comparable skill could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill and caution in: (1) selecting an agent; (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation.

It is common for trustees to delegate the oversight for the investment management of the trust assets to an investment advisor. Section 456.8-807 RSMO is very similar to Section 469.909 RSMO, which provides in part that a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill and caution in: (1) selecting an agent suitable to the exercise of the delegated function, taking into account the nature and the value of the assets subject to such delegation and the expertise of the agent; (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (3) periodically reviewing the agent’s actions in order to monitor the agent’s performance and compliance with the terms of the delegation. http://www.moga.mo.gov/mostatutes/stathtml/46900009091.html. Section 469.909 RSMO sets forth the three main criteria that must be followed when delegating the investment management to an investment advisor; namely care in selecting an agent, establishing the proper scope and terms of the delegation and holding periodic reviews.

Additional Types of Trusts

The living trust typically forms the foundation of most estate plans. There are, however, many additional types of trusts which can be drafted and utilized depending on the specific situation. These additional trusts include, but are not limited to:

  • Charitable Lead Trust
  • Charitable Remainder Annuity Trust
  • Charitable Remainder Unitrust (CRUT)
  • There are four types of CRUTS:
  • Standard Unitrust
  • Net Income Unitrust
  • Net Income with Makeup Unitrust
  • A Flip Unitrust
  • Grantor Retained Income Trust
  • Grantor Retained Annuity Trust
  • Missouri Asset Protection Trust
  • Qualified Personal Residence Trust
  • Qualified Terminable Interest Property Trust (Q-TIP)
  • Special Needs Trust

If you have questions concerning trusts, please feel to contact one of the Missouri licensed attorneys at the offices of Gregory E. Robinson, P.C., at 636-532-9500.

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