How Trusts Work
A trust is created by an individual, called the “grantor” or “settler,” depending on the state, who transfers property to the custody of another individual that he appoints as trustee. The trustee is responsible for administering the trust property for the benefit of one or more beneficiaries named by the grantor. He may distribute trust property to the beneficiaries in a lump sum, for example, or in annual installments. The trustee is obligated to manage trust property prudently and in the best interests of the beneficiaries. His discretion is limited by the terms of the document that created the trust, which may be a declaration of trust or a last will and testament. The trustee has the power to manage trust property as set forth in the trust document even over the objections of the beneficiaries.
A living trust takes effect while the grantor is alive and may be either revocable or irrevocable. If it is revocable, the grantor may revoke the trust or remove the trustee at any time. An irrevocable trust cannot be revoked and the trustee cannot be removed without the consent of the beneficiaries or a court of competent jurisdiction. To be appointed trustee of a living trust, find a grantor willing to create a trust and contribute property to it for the benefit of the beneficiary you seek to protect. He must create a declaration of trust, appoint you as trustee, name the beneficiaries, spell out the terms of the trust and sign the declaration. How much discretion you have when dealing with trust property will depend on the terms of the trust. It is acceptable in every state to create a trust, fund it with your own property and appoint yourself trustee.
A testamentary trust is created by the terms of a last will and testament, and it does not take effect until after death, when it becomes irrevocable. Normally, the person who creates the trust will name you in the will. You may not assume control over the trust until the probate court formally appoints you as trustee. Although the probate court is not obligated to appoint the trustee named in the will, it typically does so. The authority of a testamentary trustee is similar to the authority of a living trustee, and your authority continues until the trust terminates or until you resign or are removed. You may serve as trustee long after the close of probate. To be appointed trustee of a testamentary trust, have someone create a trust by the terms of his will, including the same information as necessary for a declaration of trust and naming you as trustee. When the grantor dies, you must attend the first probate hearing so that the probate court can formally appoint you.
Attorney-in-Fact vs. Trustee
A power of attorney authorizes you to perform legal acts on behalf of the principal, such as signing contracts, accessing bank accounts or selling property. Unlike a trusteeship, however, a power of attorney does not deprive the principal from performing these acts himself. For example, even if you are granted the ability to transfer title to real estate on behalf of the principal, he has the right to transfer title himself (unless he is a minor), and a power of attorney does not give you the right to prevent him from doing so. A minor cannot act as a principal; a parent or legal guardian must act on his behalf. The principal may revoke power of attorney at any time. The most important use of a power of attorney is when the principal is legally incompetent – mentally disabled, unconscious or unable to communicate. Under these circumstances, you will have the sole authority to perform legal acts on behalf of the principal, as long as he did not also grant power of attorney to someone else.
Creating a Power of Attorney Form
To create a power of attorney, you must draft a document, called a "Power of Attorney," that identifies both you and the principal. This document must list the specific powers the principal is granting you. The principal may not authorize you to perform any act that he is not entitled to perform himself. The document should state whether the power of attorney is durable (remains in effect even after the principal becomes incompetent), and it should list the starting and ending dates, if applicable. The principal must sign and date the power of attorney before a notary public. You must present the power of attorney form when exercising legal rights on behalf of the principal – for example, you must present it to a bank officer when withdrawing funds from the principal's bank account.