Some of my prior posts have references to trusts. However, I have yet to give a basic explanation of how they work. Hopefully, this post will give those without experience with trusts some basic knowledge. One key feature of a trust is the division of the benefits and burdens property ownership. For example, trusts are often used when children inherit large sums of money and someone thinks it's unwise to allow a 13 year old to immediately use the money as they deem fit.
Traditionally, a trust is an arrangement where property is managed by one individual for the benefit of another. There are usually three roles involved when setting up a trust. First, the Settlor is the person who contributes property, known as the corpus, to the trust. Second, the Trustee takes title to the property and is charged the managing it in the interests of the beneficiaries. Lastly, the Beneficiary is the individual who receives the benefit of the property. For example, Sally (the Settlor) has some money. Sally then gives the money to Ted (the Trustee) to hold for the benefit of Bill (the Beneficiary). Ted then invests/manages this money, distributing the income to Bill in accordance with the terms set forth by the Settlor.
Types of Trusts
Trusts can be set up in a variety of ways to achieve the goals of the Settlor. The following are just a three examples of trust arrangements:
1. Revocable Inter Vivos Trusts
Revocable Trusts are a popular probate avoidance tool. For example, Pete Peterson wants to prevent his family from having to deal with probate. Pete transfers title to his property to himself as trustee of a named trust; for example, The Peterson Family Trust. Pete also names himself as beneficiary. In this arrangement, Pete is fulfilling all three of the roles discussed above. Pete's trust will name successor a trustee and beneficiary. When Pete eventually dies, the successor trustee will either transfer trust assets to the successor beneficiary or manage the property for his or her benefit.
2. Special Needs
A Special Needs Trust (SNT) is a trust that is commonly set up for a beneficiary with some form of disability. A SNT is used to provide the beneficiary with some level of comfort, entertainment, or recreation. The trust is set up in way so that the beneficiary is able to continue receiving public benefits for their necessities. Often, a SNT will provide for its termination upon the event of the beneficiary losing a needed public benefit.
3. Charitable Trusts
A Charitable Trust is a trust that is created for a "charitable purpose." A charitable purpose is defined in Maine's Uniform Trust Code as ". . . the relief of poverty; the advancement of education or religion; the promotion of health; governmental or municipal purposes; or other purposes the achievement of which is beneficial to the community." 18-B M.R.S. § 405(a). Further, if no charitable purpose is clearly defined, "the court may select one or more charitable purposes or beneficiaries. The selection must be consistent with the settlor's intention to the extent it can be ascertained." 18-B M.R.S.A. § 405(b).
A trust is can be complex legal arrangement that should be set up in a way that best achieves your goals. Contact an attorney if you think a trust is something that might be appropriate for your situation. An attorney will be able advise you if a trust is right for you and, if appropriate, set it up in a way that is best for you.