Trust Basics

What Is A Trust?

A Trust is simply an agreement between two parties for one party, the Trustee, to hold and manage the property of the other party, the Grantor (a/k/a Settlor) for the benefit of someone, the Beneficiary. The Grantor is the creator of the Trust and is the one who specifies the provisions of the Trust, which can be as broad or narrow as the Grantor likes.

Who Can Be The Beneficiary?

Any person or entity can be the Beneficiary of the Trust, including the Grantor. Typically, Trusts are created for individuals and charities. Now, in Maryland, you can create a Trust to take care of a pet.

How Is A Trust Created?

A Trust can be created during the lifetime of the Grantor by a written agreement with the Trustee. The Grantor can retain the power to modify or revoke the Trust. These Trusts are known as Revocable Trusts or Living Trusts. When the Grantor has no power to modify or revoke the Trust, the Trust is known as an Irrevocable Trust. All Trusts created during the Grantor’s lifetime are known as Inter vivos Trusts. A Trust can also be created by the Grantor at death under the Grantor’s Last Will and Testament. These Trusts do not come into existence until the Grantor’s death and are known as Testamentary Trusts.

How Long Can A Trust Last?

In Maryland, Trusts created after 1998 can go on in perpetuity. A Trust created before 1999 must terminate after a certain time, typically 21 years after the death of the first Beneficiary of the Trust. A Trust for charities can go on in perpetuity regardless of the date it was created.

Can There Be Multiple Beneficiaries Of The Same Trust?

Yes. A Trust can have one or more Beneficiaries at the same time and can have successive, or remainder, Beneficiaries. For example, Dad creates a Trust during his lifetime to own a life insurance policy. After Dad dies, the Trustee receives the life insurance proceeds to hold in the Trust for the benefit of Mom for her lifetime. Mom receives the income from the Trust. Mom and the children may receive principal from the Trust for their support. After Mom dies, the Trust terminates and the remaining assets are distributed to the children.

What Can A Trust Do For Me?

The benefits of Trusts are numerous. The main benefit is the protection of the assets held in the Trust. A properly established Trust can save estate taxes at death thereby preserving more of the assets for the family. A Trust can preserve the assets for a Beneficiary who has a creditor problem or a failed marriage. In such a case, the creditor or ex-spouse cannot reach the assets of the Trust as they could if the Beneficiary owned them in his or her own name. Also, a Trust can preserve the assets for a Beneficiary who has diminished capacity to manage his or her own financial affairs or who has spendthrift tendencies. In the case of a Revocable Trust (a/k/a a Living Trust), the administration of a decedent’s estate can be streamlined, particularly when real property is owned in two or more states, and the privacy of the decedent can be preserved.

What Are The Responsibilities Of The Trustee?

The Trustee, who can be an individual or an entity, such as a bank or trust company, legally owns property in the Trust (known as the principal or corpus). Because the Trustee holds the assets of the Trust for the benefit of the Beneficiaries, the Trustee has certain responsibilities and owe certain duties (both of which are known as “fiduciary duties”) to the Beneficiaries. A Trustee’s fiduciary duties are mainly governed by the Trust Agreement or the Will. The law governing the Trust also imposes fiduciary duties on the Trustee, which duties are briefly stated in the next few paragraphs.

A Trustee is responsible for the preservation and protection of the assets of the Trust and the promotion of the best interests of the Beneficiaries. A Trustee owes a duty of loyalty to the Beneficiaries of the Trust and must not act in his own interests or in the interests of third persons at the expense of the Beneficiaries. A Trustee owes the same duty to all Beneficiaries of the Trust and may not act with partiality or favoritism to some Beneficiaries at the expense of the other Beneficiaries unless the Trust Agreement or Will indicates otherwise.

A co-Trustee generally cannot shift his legal responsibility to perform his duties to another by delegating those duties. A Trustee must be careful and diligent in the exercises of his duties and powers and is required to use the care, diligence and prudence in the administration of the Trust as an ordinarily careful person would use under like circumstances with respect to that person’s own affairs.

A Trustee is not necessarily required to maximize the return on Trust investments but must secure a just or reasonable return while avoiding undue risk of loss of the principal. The law with respect to the investments made by a Trustee is complex and a special election may be available to have a different type of legal standard govern the Trustee’s investment decisions.

Does A Trust Pay Income Taxes?

Sometimes. If the income is distributed to the Beneficiary, the Beneficiary pays the tax on the income. If the income is retained in the Trust, the Trust pays the income taxes. Capital gains are considered principal items of the Trust and the Trust typically pays the capital gains taxes.

At Rutledge|Aitken we believe it is essential that our clients fully understand all the components of the process they are undertaking. These educational materials are intended to start that process by providing a sketch of the information upon which to build.

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