A person cannot create a trust without intending to do so. Title to property held in trust is divided into two interests upon transfer to the trust. The first interest is called the legal interest. The person in charge of the trust, called the “trustee,” holds the legal interest. The second interest is called the equitable interest. The person for whom the property is held, called the beneficiary, holds the equitable interest. Assume, for example, that John gives $500 to Betty and tells her she can do anything she wants with the money because she is the trustee. This transfer is a gift rather than a trust, even though John used the word “trustee,” because there is no equitable interest here. In other words, because Betty does not hold the $500 dollars for the benefit of a person other than herself, there is no trust. Trust intent is usually evidenced by express language in the trust document to avoid any potential confusion later on.
Valid Trust Purpose
A trust may be established for any purpose so long as the purpose is not illegal. Assume, for example, that a mother creates a family trust for the benefit of her daughter and specifies in the trust document that the property held in trust may only be used to pay for the daughter’s well-being if the daughter is convicted of a crime resulting from political activity. Some courts would look to the mother’s intent to determine whether she created the trust for a valid purpose. If the court found that the mother created the trust to motivate her daughter to commit a crime for political purposes, the court would likely invalidate the trust as having been established for an illegal purpose. Other courts, instead, look to how the trust property would be used. If a court following this approach found that the mother was only concerned for the well-being of her daughter, the trust had a valid purpose.
Even if a person intends to create a family trust with a valid trust purpose, a trust must hold property. By definition, a trust that does not hold property is not a trust. Transferring property into the trust, sometimes referred to as “funding,” is of the utmost importance after signing the trust document. The means by which property is transferred to the trust depends on the type of property. Real estate is typically transferred to the trust by way of a deed. Assets held by a financial institution, such as a savings account or a certificate of deposit, are transferred into the trust by changing title to the asset. Even items of tangible personal property must be transferred to the trust by way of a transfer document. Failing to properly transfer property into a family trust is among the more common reasons why such a trust will fail.
A family trust must have at least one trustee. If a family trust is created by a married couple, the spouses usually serve as co-trustees. If an unmarried person creates a family trust, the person who creates the trust usually serves as trustee. There is no requirement that the person(s) who creates the family trust serve as the trustee. To serve as a trustee, the person must have the legal capacity to hold and manage property on behalf of the beneficiaries. If a person other than the one who creates the trust is designated as the trustee, that person becomes the trustee only if she accepts the duties of trustee. In some states, a trustee must swear an oath to faithfully perform the duties of the trustee, and the trustee may be required to purchase a bond that protects the beneficiaries if the trustee mismanages the trust assets.
A family trust cannot exist without at least one beneficiary other than the person who created the trust. Family trusts usually name the person who created the trust as the initial beneficiary and that person’s children or other family members as the final beneficiaries. In most states, a beneficiary must be a human being or a charitable organization. A person may wish to name the family pet as a beneficiary. Most states will permit such a designation only if the trustee is willing to carry out the terms of the trust with respect to the pet. The rationale for this rule is that the pet cannot enforce the terms of the trust if the trustee does not abide by those terms. A few states do allow a person to name a pet as a beneficiary of a trust. These states allow anyone to sue the trustee on behalf of the pet if the trustee does not follow the provisions of the trust that pertain to the pet.