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Trusts

I. GENERAL CONSIDERATIONS

§ 251:1 Introductory comments

A trust may be defined as the legal relationship between one person having an equitable ownership in
certain property and another person owning the legal title to that property, with the former being entitled to
the performance of certain duties and the exercise of certain powers by the latter, which performance may
be compelled by a court of equity. (1)

Throughout this chapter, the person creating the trust will be referred to as the trustor or settlor, the person having
the equitable interest in the trust property will be referred to as beneficiary, and the person or entity having legal title
to the trust property will be referred to as the trustee.

A trust may be classified in different ways. Based on the time at which it becomes effective, a trust may be
classified either as a testamentary trust, becoming effective after the death of the trustor, or an inter vivos or living
trust, becoming effective during the trustor's lifetime. Another basis for classification is the nature of the force
bringing the trust into existence, there being express, often called voluntary, trusts and trusts created by operation
of law, or involuntary trusts. The terms "voluntary" and "involuntary" may also be used in defining whether a
trust has been founded on a donation or on a contract supported by consideration. (2)

Express trusts may be further classified as passive or dry, and active or live trusts. Generally, a passive trust is one
in which no active duties are imposed on the trustee. (3)

Footnotes
(1)Text references: Definition of trust, generally. 76 Am Jur 2d, Trusts §§ 1, 2.
Legal periodicals: An Outsider's Viewpoint of the Nature of Trusts. 14 Cornell LQ 52.
– The Origin of Uses and Trusts, 21 Harv LR 265.
– Social Investing and the Law of Trusts. 79 Mich. LR 72.
– The Definition of a Trust. 8 Virginia LR 426.
(2)Text references: Classification and nomenclature of trusts, generally. 76 Am Jur 2d, Trusts § 8.
Legal periodicals: Protecting the Mentally Incompetent Child's Trust Interest from State
Reimbursement Claims. 58 Denver LJ 557.
Income, Gift and Estate Tax Aspects of Alimony Trusts. 119 Trusts & Es 54.
(3) Text references: Trust as passive or active. 76 Am Jur 2d, Trusts § 10.

17A Am Jur 2d Legal Forms, § 251:1, 1995, pp. 36-37.

§ 251:93 Form drafting guide

Trusts are commonly created by the transfer of property inter vivos by the owner to another as trustee. The
trust may be created for the benefit of a third person or persons, for the trustor himself, or for both the
trustor and one or more third persons. (15)

Inter vivos or "living" trusts can be advantageous for any number of reasons. Tax benefits are most frequently the
motivating force in deciding on and drafting inter vivos trust agreements, but nontax factors are frequently
important. These include, for example, protection against a beneficiary's inability to manage property, avoidance of
probate expense and delay and of publicity about the trustor's estate, relief of the trustor from the cares of
management of the trustor's property, protection of the trustor in the event of incompetency, and creation of
authority and capacity of an experienced and reliable person to apply the income and corpus of the property to the
beneficiary's problems as they arise in the future. (16)

The elements essential to an inter vivos trust agreement are those required in creating any valid express trust. The

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language used should clearly indicate the trustor's intention that ascertainable property is to be held by a trustee
and that the income from the property is to be to a specific purpose for an indicated period of time. (17) While the
statute of frauds in some jurisdictions requires that only trusts in real estate be created in writing, (18) an extensive
trust instrument should be drafted, specifying clearly and in detail all important aspects of the execution and
administration of the trust and the disposition of the trust property. An inter vivos trust is necessarily a rather
complex arrangement. In particular, complex tax problems may arise regarding not only income taxes but also
estate and gift taxes. A detailed instrument will avoid needless litigation and enable the trustee to administer the
trust with greater confidence.

An inter vivos trust agreement usually takes the general form of a contract between the trustor and the trustee. (19)
The corpus, or principal, is either described in the instrument or in an attached schedule, and the trustee
acknowledges receipt of the property. (20) The dispositive provisions may provide for both current and remainder
interests. Care should be taken to comply with the rules in the particular jurisdiction limiting restraints on alienation,
remoteness of vesting, and the accumulation of income. (21) The trustee's administrative and discretionary powers
and limitations on those powers should be described in detail, as should any powers reserved by the trustor and
any powers of appointment created in third parties. (22) Provision should be made for the trustee's compensation
and the trustee's right to resign. (23) The trust should be made expressly revocable or irrevocable or partly
revocable and partly irrevocable. (24)

Inter vivos trust instruments effecting a conveyance of realty are governed by the usual requirements in the
particular jurisdiction with regard to acknowledgment, seal or attestation, and recordation. (25)

Tax Checkpoints: Income, estate, and gift tax considerations should be kept in mind at all times when drafting an
inter vivos trust instrument. The trustor may be subject to a gift tax on creation of an inter vivos trust. However, the
trustor is generally not taxed on trust income and the trust property is ordinarily not considered part of the trustor's
estate for tax purposes, unless the trustor has retain certain prescribed beneficial interests in or controls over the
trust property. The trust is subject to taxation as a separate entity on income that it accumulates, but not as
to income it distributes. The trustee is not subject to taxation on trust income but is responsible for tax
reporting. The beneficiary is generally taxed on trust income as received. The usual consequences of trust
creation and operation may be assured or changed for the better by proper drafting. (26)

Footnotes
(15) Text references: Definition of inter vivos trust. 76 Am Jur 2d, Trusts § 8.
(16) Text references: Purposes of trust. 76 Am Jur 2d, Trusts § 21.

Legal periodicals: Three trust documents. ALI-ABA Course Materials J vol 4 No. 5 p. 37.
– The income tax problems of using alimony trusts. 63 Cornell LR 1022.
– Adjustment for inflation for fixed-income trust beneficiaries. 54 Notre Dame Law 661.
– The alimony trust. 33 Tax LR 577.
– Nontestamentary uses of trusts. 120 Trusts & Es, No 1, p. 6.
(17) Text references: Essentials and requisites of express trust. 76 Am Jur 2d, Trusts §§ 46, et seq.
(18)Text references: Application of statute of frauds to trust agreements. 76 Am Jur 2d, Trusts §§ 68
et seq.
(19) Text references: Formation of contracts. 17A Am Jur 2d, Contracts §§ 16.
(20) Text references: Trust res. 76 Am Jur 2d, Trusts § 47.
(21) Text references: Estates and interest in trust property. 76 Am Jur 2d, Trusts §§ 275 et seq.

Text references: Powers of trustee. 76 Am Jur 2d, Trusts §§ 338 et seq.

(22)

– Resignation of trustee. 76 Am Jur 2d, Trusts § 255.

(23)Text references: Compensation of trustee. 76 Am Jur 2d, Trusts §§ 637 et seq.
– Resignation or removal of executor, administrator, guardian, or trustee, before final administration
or before termination of trust, as affecting his compensation. 96 ALR3d 1102.

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Text references: Duration, termination, and setting aside of express trusts. 76 Am Jur 2d, Trusts
(24)

§§ 92 et seq.
(25)Text references: Formal requisites of conveyance of realty. 23 Am Jur 2d, Deeds §§ 105.
Am Jur Proof of Facts: Grantor's intent that grantee hold realty in trust. 4 Am Jur Proof of Facts 2d
41.
(26)
For discussion of federal tax statutes, regulations, and court decisions to inter vivos trust
agreements, see FEDERAL TAX GUIDE TO LEGAL FORMS, 180 et seq.

17A Am Jur 2d Legal Forms, § 251:93, 1995, pp. 152-154.

American Jurisprudence Index

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