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The principal is the property that is contained in the trust that produces income like dividends, rents, and interest. Payments for bills to the trust may be paid out of either income or principal but payments to beneficiaries may be made out from income only. Where such payments will be made lies within the discretion of the trustee. Determining the proper distribution of income and principal is one of the more important functions of the trustee. The persons who benefit from the operation of the trust may differ from the persons who are entitled to the principal when the trust terminates to an accurate balancing of payments from income and principal is essential to the proper administration of the trust.
The handling of the income and principal in a trust can be a complicated affair and can subject the trustee to some criticism from beneficiaries and so a trustee should consult an experienced professional, both legal and accounting, when making determinations in this area. There are strict and complicated tax considerations in regard to trust administration and some of these considerations differ from ordinary treatments of income and principal.
Chapter 8: Modification and Termination of Trusts
The modification and termination of a trust depend heavily upon the circumstances. The laws in this area differ depending on the jurisdiction in which the trust is governed and is essential that local statutes must be reviewed before attempting any modification or termination. Under normal circumstances, if the grantor of the trust has the capacity to approve a modification or termination such change will be approved even if such change is inconsistent with the original purpose of the trust. Even when the grantor lacks the required capacity but has signed a valid power of attorney the modification or termination will be recognized but such recognition is limited to the expressed authority set forth in the document creating the power of attorney or the trust agreement.
In the event that the grantor is unable either due to death or incapacity, the trust may still be modified or terminated if all the beneficiaries consent and the court determines that the continuance of the trust is not necessary to achieve any material purpose stated in the trust. The final distribution, if it differs from the terms of the trust, must be done in accordance with the agreement of the beneficiaries.
Chapter 9: Trusts Arising by Operation of Law
There are isolated circumstances where trusts are created by operation of law, that is, they are created automatically because other arrangements have not been made. In order to cause confusion and/or delay in the execution of certain assets, property is transferred to another through some legal arrangement or prior written assignment that has never been changed. Under the operation of law trusts are created that expedite the transfer of property so that the beneficiaries are relieved of onerous procedural requirements. Trusts created by operation of law are divided into two distinct types: resulting trusts and constructive trusts. A resulting trust is implied by the law to reflect the presumed intentions of the parties while a constructive trust is implied by law in order to effectuate justice and there is no regard afforded the parties' intentions.
A trust is a legal creation wherein a right in property, either real or personal, is held by a fiduciary for the benefit of another. The individual in the fiduciary position is identified as the trustee and he is the person who actually holds legal title to the property while the person to whom the benefits of the property flow is known as the beneficiary. Such individual holds equitable title to the property contained in the trust.
The purposes for creating trusts are numerous and can incorporate nearly every condition imaginable. Until recently, the law supporting the creation of trusts was governed largely by the state laws of the jurisdiction in which the trust was created but the adoption of the Uniform Probate Code has had considerable impact on the law supporting trust agreements and many jurisdictions have adopted the provisions of the Uniform Code.
The advantages connected to the use of trusts include minimizing one's tax liability through the use of such trust devices as the marital deduction trust, a Crummey trust, or irrevocable life insurance trusts. Each of these trusts have unique features and are specific to one's specific needs but they all share the common goal of avoiding the payment of estate taxes.
Trusts can also be utilized to avoid the need to probate one's estate upon death. Through the use of a trust arrangements can be made through the terms of the trust to provide for one's family without interruption as upon death the trustee is immediately empowered to continue operation of your business. The use of the trust also protects the deceased family from undergoing public exposure and scrutiny that might result from the public disclosure of the estate's assets at the time of the decedent's death. The records of the probate court are public and subject to inspection by anyone with an interest. Trust documents are not public record and do not have to be probated. For the most part, the contents of a trust are never disclosed to the public.
The selection of a reputable trustee is an important feature in the creation of a trust. The chosen trustee should be someone who is not only trustworthy but should also some measure of professional expertise in the areas of law, accounting, or finance. It has become increasingly more popular to choose an institutional trustee such as a bank that has a dedicated trust department that is accustomed to the intricate administration of trusts. Institutional trustees provide a measure of detachment that is often important in the sensitive management of the relationship with beneficiaries of the trust which is an additional reason for opting for this approach.
Trusts do not become valid until ownership of the property that is to become the corpus of the trust is transferred to the trust. Accompanying the transfer of this property a trust agreement should be drafted setting forth the specific powers and authority of the trustee, designating the beneficiaries, and how the property in the trust will ultimately be distributed.
Although there are a variety of different types of trusts there are two general types: irrevocable and revocable. In the case of revocable trusts, the grantor retains the right to revoke the trust and most of the control over the property contained in the trust. Irrevocable trusts are far more limiting and, in most cases, require that the grantor surrender most or all control over the property to and independent trustee.
The power to determine when a trust will end lies with the original grantor. The intent of the grantor may be to have the trust to exist for a relatively short period of time in order to either to avoid payment of taxes or to avoid probate. In such case the trust may end upon the grantor's death or shortly thereafter. In other situations the grantor's intent may be to provide for the long-term care of his family and grandchildren. Under such circumstances, the trust may run for many years. Drafters of all trust agreements, at least those expected to last a number of years, must consider the Rule against Perpetuities and Restraints on Alienation and their application in the jurisdiction where the trust is being drafted.
The type of trust that a grantor chooses to utilize depends entirely upon the circumstances dictating the need for the trust. Trust law and trust plans have largely developed in response to tax laws. As the tax laws changed, new trust documents were created by individuals attempting to minimize their tax liability or to protect their assets. Determining which trust form to utilize is dependent on the specific circumstances of the grantor. The importance of acquiring competent professional advice prior to opting for a specific form is vitally important.
The creation of a trust does not mean that the document cannot be modified or terminated if the need for such action arises. Each jurisdiction has its own laws relative to how modifications and terminations can be effectuated but, in general, modifications and terminations can be made to the trust as long as the grantor still has the legal capacity necessary to convey its intentions. In circumstances where the grantor's legal capacity is in question and where a power of attorney has been endorsed or the beneficiaries petition the court to do so, the trust can also be modified or terminated.
The law surrounding trust law is complex and requires the services of legal and accounting professionals experienced in the area. Trusts are a…[continue]
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