A Guide to Lawyer Language: Understanding Trusts
If you are like many people you agree that lawyers sometimes use language that seems complex or even impossible to understand. If you're like me, you've also had the experience where you think that you've been very clear but the other person (whether a lawyer who you're paying or a spouse or friend) doesn't really understand what you want and need. And, since no one likes to pay for something they did not want or need, it is crucial that you and your will or trust attorney are not confused about what you want for yourself and for your heirs. For that reason, we put this report together to help you understand some basic terms that a lawyer may use during the creation, modification, and or the execution of a trust. The more you understand the more likely you will avoid confusion. You will get what you want and be better able to express your needs and wants in a way that gets you just that and at the best price.
Lawyers, like doctors, physicists, and many other professionals, use technical terms, expressions, and vocabulary daily. As a result, they often don't realize the words seem foreign to you. So, to help you better understand what your lawyer is saying here are some important expressions that we have defined for you. Many of these terms are legal terms with legal significance and the meaning can even vary based on state law. The exact meaning can be important so don't be shy. Be proactive. Ask questions, and remember that the lawyer may be assuming that you know and understand the meaning of these terms.
A written instrument created and executed by someone (known as a grantor, settlor, or donor) for the benefit of another person (known as a beneficiary). It is a relationship formed by a settlor transferring assets to a trustee to be managed according to the trust document for the benefit of a spouse, children, grandchildren, or others. Trusts are like a separate company with leaders set by you to manage assets for other people. Trusts can be set up on their own or under a will. The trust instrument contains the rules of the trust such as who gets money, when do they get money and for what purposes, who manages the money, who keeps records, files tax returns, and who can terminate the trust and even fire and hire trustees.
Trust Creator, Grantor, Settlor, Donor:
These expressions all refer to the person who creates the trust. The particular term used varies from lawyer to lawyer and state to state. This individual (or couple if your married) then usually transfers assets to a trust. That is called "funding the trust".
This is the person, people, or class of people who have a "beneficial interest" in a trust. In other words, the trust has been created for their benefit. There may be primary and secondary or contingent beneficiaries. The primary beneficiary is someone who is entitled to receive current benefits from the trust's assets. Contingent beneficiaries get income or principle from a trust only when a primary beneficiary dies or at some earlier time determined by the trust.
This is someone who is entitled to receive some or all of the income generated from the trust's assets.
This person is entitled to distributions of the assets of the trust rather than just income.
Remainder or Contingent beneficiary:
This is someone who has been named to receive the assets in the trust (the principal and any accumulated income) after the interest of a prior beneficiary has been terminated for example, through death. For example, a trust may give all of the income to a surviving spouse for his or her lifetime. Then, at the death of the surviving spouse might distribute to children in equal shares.
An individual, bank, or trust company that manages assets placed into a trust by following the language of the trust document. The trustee has legal title to the property in the trust for the benefit of the beneficiary. Trustees may be family members, friends, or professional trustees such as trust companies or banks. In some situations, the trustee may be the original settlor and/or beneficiary (a revocable living trust). The trustee owes a "fiduciary duty" to the beneficiary and must carry out specific duties with regard to the property. The trustee must also engage in fair dealing, must comply with state and federal laws, and must keep good records.
This is the obligation (created by law) which a trustee owes the beneficiaries of a trust. Having a fiduciary duty means that the trustee has special responsibilities to the beneficiary of the trust. These responsibilities vary from state to state and from trust document to trust document but in Pennsylvania include the duty to manage the assets professionally, of fair dealing, and to keep records accurately, among others.
This is another expression for the principal of the trust and may also be referred to as "estate" or "res". These are the assets that are in the trust at any point in time. The corpus of a trust can change as assets are sold, invested, and distributed and as investments are made in new assets such as stock, bond, real estate, or even in cash.
The Rule Against Perpetuities:
The rule, now modified in a significant number of jurisdictions, that no interest in property is good unless it vests within a certain time is designed to prevent "perpetual trusts." A clause in the trust may be needed to avoid this potential problem.
Types of Trusts:
Be aware that there are literally hundreds of different types of trusts. However, below is a list of a few of the most common types of trusts. For more information please see our guide How to Find the Right Trust for You to read more about these trusts and many more.
There are revocable trusts that may be modified and irrevocable trusts that may not able to be changed once they are created without the agreement of the trustee and beneficiaries, or by court order.
There are living trusts that are also called inter vivos trusts, since they are created and are active during the trust creator's lifetime.
In addition there are testamentary trusts that are created under your will and are only "activated" or funded when you die.
Each type of trust may serve different functions and be organized differently. There are also many specific living trusts for specific purposes.
A grantor retained annuity trust (GRAT) is often created with the specific purpose of removing the threat of estate taxes on assets and their future appreciation.
Charitable remainder annuity trusts (CRAT's) and charitable remainder uni-trusts are used to keep an income flow from assets donated to a charity.
An elder law or nursing home trust can also be used to protect assets from being dissipated when you need long term care. Note: These trusts must contain specific provisions and most trusts do not offer this protection.
Legal Significance of a Trust:
Now that you understand some key legal terms let's explore the legal significance of a trust, and why you might want or need one.
A trust is used when a property owner wants to give a benefit (either now or in the future) to another person, like a child and/or charity. Trusts may be created during a person's life (usually by a trust instrument) or after death in a will. Any type of property may be given to a trust but state laws and the trust instrument regulate what can be held in a trust. A trust may be used for tax benefits, estate-planning benefits, and asset protection purposes. For example, the assets in a trust may avoid the probate process. A trust may be used to convey property to a minor, to someone with special needs, or someone who needs oversight with finances. And, trusts can be used to split or balance the interests of different beneficiaries. For example, a trust can provide income to a surviving spouse and at his or her death leave the remaining assets to children.
Trusts can be an important and useful tool for you and your estate and asset planning. There are many different types of trusts and there is no such thing as a one size fits all trust. A trust must be customized to do what you want it to do like providing for a minor or for tax benefits.
ConclusionUnderstanding trust vocabulary and the many uses of trusts will help you to get what you want and need from a lawyer and will set you on the path to have an organized system in place to save your heirs money, to provide for another's care, to give funds to a charity, and for many other purposes that you specify.
Before beginning your search for a will or trust lawyer you want to understand lawyer vocabulary and you want the lawyer to be able understand you. We hope this report has helped give you clarity in this often-complex area of law involving trusts.
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