Trusts are not for the rich. They are used for amounts as small as $10,000. Because they are often a private family matter, few facts are available on their number or average size. However, the average size of all currently active American trusts is probably between $55,000 and $110,000.
Trusts date back to William the Conqueror. He ruled England from 1066 to 1087. It permitted the owner of land to control its disposition over extended periods, even after their deaths, while confiding the land’s use or benefit, but not its legal ownership, to other persons during the term of the trust. As the years passed, the trust became used for property other than land, such as farm equipment, collectibles, livestock, art and furniture. Eventually, almost anything an individual could own could be trusted, although it was not until the early 19th century that trusts were allowed to hold stocks and bonds.
The trust concept was brought to North America by English colonists. Until the first half of the 20th century, only very wealthy Americans could afford trusts. As individual American wealth expanded following World War II and with the enactment of more complex tax laws, estate planners turned to the trust as an efficient instrument for the disposition of individual wealth. By the early 1960s a high percentage of prosperous Americans had embraced trusts for estate planning. The movement in that direction has never stopped.
The use of trusts today is confined primarily to the United States, Britain and former British colonies. They are almost unknown elsewhere, although in recent years there has been a movement among international lawyers’ groups to introduce trusts as a way of transferring multi-county estates.
A body of trust law has long governed how trusts may be used and how they are to be managed by trustees. In its early stages this law was very restrictive, primarily because a trust by its nature involves a fiduciary relationship, which means having a duty toward others. The law chose to impose on the fiduciary its highest standard of conduct. That remains true to this day.
This has survived the centuries relatively unchanged, because of its intrinsic power and versatility. It permits an owner to give varying interests in property to more than one person, over a designated period and for a variety of purposes that suit the owner’s objectives, while giving a third party (the trustee) the responsibility of carrying out his or her wishes. This almost amounts to being able to write one’s own law.
The two main categories of trusts are living trusts and testamentary trusts. A trust established during the life of its creator is a living or inter vivos trust, and the person who creates it is variously called the settlor, the trustor, or the grantor. When created by a will, it is known as a testamentary trust or a trust under will. The creator is the testator.
Living and testamentary trusts are almost identical. They differ mainly in grammatical style, with living trusts using the third person (e.g., “the income of the trust shall be paid to the settlor’s issue”) and testamentary trusts using the first person (e.g., “I direct that the income of the trust shall be paid to my issue”). Both trusts have income beneficiaries, a trustee or trustees and a remainderman or remaindermen who take the property when the trust ends. Living trusts are funded as soon as the settlor adds property to them. A testamentary trust is activated only when the testator dies. Some trusts, both living and testamentary are court supervised; meaning that under state law the trust and the trustee’s activities are subject to court monitoring. Others are not, and they come under court power only when a trustee or beneficiary seeks the court’s assistance. Which course is followed depends on state law. The trend is away from court supervision.
The above is just a basic outline of what trusts are. Like any type of financial or estate planning, one must be fully informed about the intricacies of trusts. Then apply the specifics of your needs to the trust and those involved in it.
Quote of the week: “Those who talk don’t know what is going on and those who know what is going on won’t talk. — Larry Speakes, White House press spokesman, November 1985
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.