What is a trust? Is it an entity like a corporation? Is it a contract or agreement? Is it a will? What exactly is it? I have heard a lot in the 17 years I have been preparing trusts. People do not know as they have heard a mix of information (much of it not accurate) and then they decipher it for themselves. I thought I would try to make break down exactly what a trust is and what the key elements are.
Let’s start with the notion that it is sort of an entity like a corporation, sort of a contract or agreement and sort of a will. It’s a little bit of each of things. First of all, though, it is not a “will” as that is a separate document that would be included in your estate plan. Second it is not officially a contract or agreement in the business sense but it effectively is that. Third, it is like an entity as in some cases (typically after death) the trust will have it’s own tax identification number (TIN or EIN). So it’s a mix of these things. The bottom line is it is a vehicle to hold your assets and provide for you while you are alive and then distribute your assets, as you instruct, after your death.
Let’s break it down further. The big keys you need to make a trust are:
1) Intent to make a trust (California Probate Code section 15201);
2) Mental Capacity to make a trust;
3) A trust must have property (PC 15202)
4) There must be a legal purpose to trust (PC15203)
5) A trust must have a beneficiary (PC 15205)
6) It generally has to be in writing (Statute of Frauds) though there can be rare exceptions. (probate code 15206 and 15207)
I will paste these code sections below for your review.
Let’s get back to the elements of the trust though. I will walk through my basic single person trust for the key ingridients of a trust. Each trust is customized for that client so please understand this is just a general overview. Some clauses are more important to some clients based on their situation and needs. Other causes are irrelevant for some people. However, these are the general sections and pieces of a California revocable or “living” trust. As always it’s important to note you should work with a California estate planning lawyer rather than trying to do this yourself!
WHO ARE THE PLAYERS:
Settlor/Grantor/Trustor: This is the person who establishes the trust.
Trustee: This is the person who manages the assets in the trust. Generally the Settlor is the initial trustee but not always.
Beneficiary: The person who receives property from the trust. Typically this includes the Settlor who benefits from the trust during their lifetime.
Introduction of the above players is first.
Then a quick review of what assets are the property of the trust. Typically this is linked to a schedule of assets attached to the trust but, of course, this does NOT mean those assets are “in” the trust. More is needed to get assets “in” to the trust.
Next is a paragraph about how the trust is for the benefit of the Settlor while they are alive. Remember the Settlor may be alive but incapacitated and thus the trust agreement has to have language instructing the trustee to take care of the Settlor while they are alive!
Next is a key section, what happens after the Settlor dies. This is generally the most customized section of a trust. There are a ton of options here and that’s where an experienced estate planning attorney is really important. A good attorney will think of options that you did not know existed!
Next is another important section… who will be the TRUSTEE of the trust. It’s so important that this person be trustworthy! If you aren’t 100% positive then pick someone else to be the trustee! The trustee section includes things about surety bonds, accountings, trustee compensation and other issues related to the trustee.
Next is the longest section of most trusts, the trustee’s POWERS. I call this the kitchen sink section because we usually include every power, under the sun, and if there was a kitchen sink power it would be included too. Usually you want your trustee to have broad power and discretion and that’s where these powers come into play. If you don’t want your trustee to have broad powers maybe you need to pick a different trustee.
The power to amend or revoke the trust is included in all revocable trusts. That is, the Settlor might want to change their trust and thus they need to be given the power to do so.
General provisions and definitions are included. Spendthrift clause, payment of taxes, holding of life insurance, and more is included here.
Alternate termination or the “perpetuities saving clause.” This basically says that your trust can not go longer than the California rule against perpetuities allows. This is longer than you will be alive, plus everybody that is alive today, plus 21 years. So, a long time! However, California does not want Rockefeller trusts that go on for generation after generation. Some states allow trusts to exist longer but not California.
The qualified sub-chapter S clause is next. We usually leave this in for anybody who might own a business. This is because the subchapter “S” is a popular way to incorporate and it requires specific trust provisions to prevail after death.
The infamous NO CONTEST CLAUSE is next. We include this in most trusts. Of course this could be blogged on it’s own as it’s a highly complex area. In my opinion it’s good to default to having a no contest clause but that doesn’t mean it’s right for every single person.
Lastly the name of the trust and any sub-trusts (generally created after death) is listed. Generally something like the “Johnson Family Trust” for example.
Now please remember that each of these clauses sounds sort of generic the way I describe it but most require customization to suit YOUR NEEDS so please work with a qualified California estate planning attorney. In my opinion it is preferable that they are a Certified Specialist in Estate Planning, Trust and Probate Law as I am. This dedication to taking a second bar exam shows a dedication to one’s work and their preferred area of law in my opinion.
Let me know if you have any questions. -John
CALIFORNIA CODES PROBATE CODE SECTION 15200-15211
15200. Subject to other provisions of this chapter, a trust may be
created by any of the following methods:
(a) A declaration by the owner of property that the owner holds
the property as trustee.
(b) A transfer of property by the owner during the owner’s
lifetime to another person as trustee.
(c) A transfer of property by the owner, by will or by other
instrument taking effect upon the death of the owner, to another
person as trustee.
(d) An exercise of a power of appointment to another person as
(e) An enforceable promise to create a trust.
15201. A trust is created only if the settlor properly manifests an
intention to create a trust.
15202. A trust is created only if there is trust property.
15203. A trust may be created for any purpose that is not illegal
or against public policy.
15204. A trust created for an indefinite or general purpose is not
invalid for that reason if it can be determined with reasonable
certainty that a particular use of the trust property comes within
15205. (a) A trust, other than a charitable trust, is created only
if there is a beneficiary.
(b) The requirement of subdivision (a) is satisfied if the trust
instrument provides for either of the following:
(1) A beneficiary or class of beneficiaries that is ascertainable
with reasonable certainty or that is sufficiently described so it can
be determined that some person meets the description or is within
(2) A grant of a power to the trustee or some other person to
select the beneficiaries based on a standard or in the discretion of
the trustee or other person.
15206. A trust in relation to real property is not valid unless
evidenced by one of the following methods:
(a) By a written instrument signed by the trustee, or by the
trustee’s agent if authorized in writing to do so.
(b) By a written instrument conveying the trust property signed by
the settlor, or by the settlor’s agent if authorized in writing to
(c) By operation of law.
15207. (a) The existence and terms of an oral trust of personal
property may be established only by clear and convincing evidence.
(b) The oral declaration of the settlor, standing alone, is not
sufficient evidence of the creation of a trust of personal property.
(c) In the case of an oral trust, a reference in this division or
elsewhere to a trust instrument or declaration means the terms of the
trust as established pursuant to subdivision (a).
15208. Consideration is not required to create a trust, but a
promise to create a trust in the future is enforceable only if the
requirements for an enforceable contract are satisfied.
15209. If a trust provides for one or more successor beneficiaries
after the death of the settlor, the trust is not invalid, merged, or
terminated in either of the following circumstances:
(a) Where there is one settlor who is the sole trustee and the
sole beneficiary during the settlor’s lifetime.
(b) Where there are two or more settlors, one or more of whom are
trustees, and the beneficial interest in the trust is in one or more
of the settlors during the lifetime of the settlors.
15210. A trust created pursuant to this chapter which relates to
real property may be recorded in the office of the county recorder in
the county where all or a portion of the real property is located.
15211. A trust for a noncharitable corporation or unincorporated
society or for a lawful noncharitable purpose may be performed by the
trustee for only 21 years, whether or not there is a beneficiary who
can seek enforcement or termination of the trust and whether or not
the terms of the trust contemplate a longer duration.