If I Create a Trust, How Do I Know My Instructions Will Be Followed

If I Create a Trust, How Do I Know My Instructions Will Be Followed?

One Estate Plan vehicle that eLegacy often recommends to our clients is a Trust. Trusts can be created for a number of reasons, and they are extremely useful for protecting assets, for passing on assets after death in lieu of a Will, and for managing your assets both before and after your death to fulfill a specific purpose. 

With respect to this last category, people often ask how they can be assured that a Trust they create will actually be used for the purpose for which it is created, long after they are gone. This is an understandable concern. However, the laws with respect to Trusts were created specifically with this concern in mind. Accordingly, if your Trust or Trusts are well-drafted, you can be confident that the assets you put into a Trust will be managed for the proper purposes. Let’s look at why this is so.

What is a Trust, and What Can It Do?

A Trust is a fiduciary arrangement designed to hold assets on behalf of a beneficiary. There are three parties to a Trust: a Grantor, a Trustee, and a Beneficiary. There may be multiple Grantors, multiple Trustees, and multiple Beneficiaries, but for purposes of this discussion, we will use the singular terms.

A Grantor is a person who creates the trust and puts the initial assets into it. That being said, once a Trust is created, it is possible for other parties to put assets into the Trust, and for the Grantor to add more assets. However, the person who establishes the Trust and establishes its terms is the Grantor. A Trustee is a person whose responsibility it is to manage the Trust according to its terms. A Beneficiary, as the name implies, is the person who is supposed to benefit from the Trust. 

It should be noted that the same person may be a Grantor, Trustee, and even a Beneficiary in certain types of Trusts. However, one person cannot be all three exclusively: in other words, you cannot create a Trust and be the sole Grantor, Trustee, and Beneficiary. However, it is possible for one person to be in all three categories, so long as at least one other person will serve as a Trustee or Beneficiary.

Trusts can be created for a number of reasons. For example, if you have a special needs child or disabled child and you are worried about how to take care of that child after you are gone, you can create a Trust that is designed both to provide financial support to your child, as well as appoint a Trustee to make certain decisions for that child that serve the child’s best interests. You can also specify a successor Trustee in the event a Trustee becomes unable to fulfill his or her role. 

Trusts can be used for many other purposes as well, but, as that example shows, it is often extremely important to you that the purpose of the Trust is faithfully carried out. How do you make sure that will happen?

Duties of a Trustee

The answer lies in understanding the legal obligations of the Trustee. In a Trust, the Grantor spells out in detail the purpose for which the Trust is created, as well as the duties of the Trustee in making sure that the purpose is fulfilled.

The Trustee role carries heavy responsibility, and a Trustee is legally bound by the Trust to meet his or her fiduciary responsibilities. This includes investing and managing the funds or assets wisely and avoiding waste. Also, the Trustee may not “self-deal” – that is, manage the assets in such a way that it benefits the Trustee in any way. Other duties may also be spelled out in the Trust, including providing a regular accounting of the assets.

If a Trustee violates (breaches) his or her fiduciary duties, the Beneficiary has the ability to sue the Trustee. In such a suit, a court has the power to force the Trustee to carry out his or her duties, and to remove and/or replace the Trustee. The court can also hold the Trustee personally liable to restore assets into the Trust if the assets have been mismanaged, wasted, or embezzled. (Note: Merely losing value is not mismanagement per se if the investment decision was reasonable and within the authority of the Trustee to make.)

When you create a Trust and you want to ensure that the terms of the Trust are fulfilled, appoint a Trustee that you believe will act responsibly and ethically. It is also helpful to appoint more than one Trustee so that decisions will not be dependent upon just one person’s judgment. In fact, you may find that people are more willing to serve as a Trustee if they know that they do not have to bear that legal responsibility alone. During your lifetime, you can serve as one of the Trustees, as well, and establish how you want the Trust administered. 

At eLegacy, we are used to helping our clients create Trusts that serve all sorts of purposes, and we can provide you with information and advice that can set your mind at ease about the operation of any Trust you create. You can be confident that we will identify any potential problems and contingencies so that your Trust addresses all of your concerns and goals. 
For more Trust questions or to help you create all of your Estate Plan instruments, contact eLegacy today.