Trusts are common tools used in estate planning, and other situations which require a third party to take control of an owner’s property to be distributed to a third party. While creation of trusts involve several unfamiliar legal terms, the basic idea of a trust is to allow someone else to hold onto your property for the benefit of a third person. For instance, you may have heard the term “trust fund baby” where wealthy parents have created a trust, managed by a bank or other financial professional, for their children to receive payments. Trusts are not only for the super wealthy, however. This article will discuss:
- What is a trust?
- Are there requirements that trusts be reduced to writing to be enforceable?
- What are the requirements of a valid trust?
- How is a trust created?
- Are there any limitations to the creation of a trust?
- How does Iowa treat trusts created in another state?
What is a trust?
A trust is created when one person gives a second person (or persons) the ability to manage some of their assets for the benefit of a beneficiary (or beneficiaries).The person who creates a trust is called a settlor. The person who holds and manages the property for its owner is called the trustee. A person who benefits from the trust is called a beneficiary. The same person may have multiple titles, for instance a settlor can be a trustee and beneficiary as well, so long as there is at least one more trustee or beneficiary.
There are many kinds of trusts. Trusts may control how a settlor’s property is distributed during a person’s life, or a trust may take effect upon a person’s death. A trust may be formed for the benefit of the settlor (for instance, if they don’t trust themselves with their funds), the settlor’s family members, charitable organizations, or other beneficiaries.
Trusts are often used as estate planning tools, as they allow assets to avoid probate, allow a settlor to have greater control over how their assets are distributed after they pass away, and can limit estate taxes.
A trust can be formed in multiple ways. However, to be enforceable by the court, it must meet the following requirements.
Are there requirements that trusts be reduced to writing to be enforceable?
An otherwise valid trust is enforceable in court if it is put in writing and signed by the trustee. It is also enforceable if it is reduced to a writing handing over the trust property and signed by the settlor.
A settlor must declare property is held in trust. The writing must be signed by the owner before or at the time of the declaration. A trust is also valid if it is signed after the time of the declaration but before the settlor has transferred the property.
The trustee can also sign the document to make it enforceable. It should be signed at the same time of or before the transfer. Or, it may be signed by the trustee, after the transfer, but before the trustee has transferred the property to a third person.
Oral (spoken) trusts that have not been reduced to writing are not enforceable by the court.
What are the requirements of a valid trust?
All of the following must be satisfied to create a valid trust:
- The settlor was mentally capable and intended to create a trust;
- The same person is not the sole trustee and sole beneficiary’
- The trust has a definite beneficiary or a beneficiary who will soon become known
- The trustee has duties to perform.
A trustee, under limited circumstances, can choose who to give the assets held in trust to. If a reasonable time passes and the trustee has not done this, the property will go to the person who would receive the property if that power were given (such as under a will or intestacy laws).
Ways to create a trust:
A trust is enforceable and valid if it meets the above requirements. The trust is actually created by one of the following methods:
- Transfer of property to another person as trustee during the settlor’s lifetime, or by will taking effect upon the settlor’s death;
- Declaration by the owner of property that the owner holds property as trustee;
- Exercise of a power of appointment (such as if a person was appointed as a personal representative of an estate) in favor of another person as trustee;
- A promise enforceable by the trustee to transfer property to itself.
Are there any limitations as to the purpose of the trust?
A trust can only be created for a private (including estate-planning) or charitable purposes that is not for an illegal or against public policy. A trust for private purpose must be administered for the benefit of its beneficiaries.
What if the trust was created in another jurisdiction?
Iowa recognizes trusts which are validly created in the jurisdiction in which the trust instrument was executed, or the law of the jurisdiction where the settlor was domiciled at the time. So, if a trust was created in a state where the trust creation laws are different from Iowa, a court will look to the laws of that state to determine whether the trust is valid.
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