IF YOU HAVE TO READ A TRUST…
Words to the wise: This article does not constitute legal advice. It is in no way a substitute for having a lawyer who works in the area of trusts and estates review your document and tell you what’s going on. What it will do is give you a basic grounding in a few key trust concepts. Just remember, a person who serves as his own lawyer has a fool for a client.
You can typically answer the following questions by reading the first few pages of the trust.
Who is the GRANTOR?
The grantor, who may also be referred to as the SETTLOR, is the person (or persons) who created the trust and contributed the trust assets. The grantor is typically identified in the first paragraph of the trust.
Who is the TRUSTEE?
The trustee is the person named by the grantor to handle three key responsibilities: to administer, invest, and distribute the trust property. The original trustee is typically named either in the first paragraph of the trust document or in a later section devoted entirely to trustees. Be mindful that the original trustee may no longer be serving, particularly with a trust that has been in existence for years, in which case you’ll need to look at appointment documents executed along the way.
The trustee has powers and responsibilities spelled out in the trust agreement, as well as under common law and state law, so, while the four corners of the document will tell you quite a bit about the trustee’s responsibilities, it won’t tell you everything. There may also be co-trustees, administrative trustees, and directed trustees, some of whom will be listed in the first paragraph of the trust agreement, and others of whom may be found in the trustee section or in appointment documents executed after the original document.
Who are the BENEFICIARIES?
The beneficiaries are those individuals or groups for whose benefit the trust is created. There may be a named individual beneficiary: “John Doe”—or a class: “the lineal descendants of John Doe.” The trust may specify current beneficiaries—those who are able to benefit from the trust property currently—as well as remainder beneficiaries, who can only benefit after the death of the current beneficiaries or a certain event. There may also be contingent beneficiaries, whose interests will arise only after the interests of the current beneficiary(s) end.
Three things to recognize when you go to read a trust:
Trusts aren’t linear. A trust and estates lawyer may read the document from cover to cover, but as often as not, if you peek in on them while they’re getting to know the document, you’ll see them flipping back and forth, looking closely at certain sections and skimming through other parts quickly. A trust isn’t a novel: It is better to think of a trust as an instruction manual combined with a rule book.
The relevant information isn’t necessary contained within the four corners of the document. For example, the trust may grant a power of appointment to a beneficiary or another party. (A power of appointment allows the beneficiary of the power to reallocate trust property in a way different from how the trust specifies—for example, it might give a beneficiary the power to re-size the shares of trust property that will go to their children, or to establish a marital trust for their spouse.) Just by reading the trust, you won’t know whether or not that power has been exercised—you would need to consult with the power holder or their counsel to find out. Also, rarely will a trust agreement tell you what trust property was contributed (other than, perhaps, a schedule indicating that $1 was contributed by the grantor). To know what the trust property is today, you would need to have access to the trust’s records.
You can’t necessarily determine the meaning or purpose of every section or paragraph based on what that section or paragraph says. For example, there are provisions, such as a power given to the grantor to borrow trust principal or income without adequate interest or adequate security, which typically are included for their tax effect, rather than their specific word-for-word meaning. Understanding the purpose of some provisions requires knowledge beyond the four corners of the trust agreement. Remember: ask for help.
If you’re a beneficiary or trustee, it can be helpful to sit down with trust counsel and walk through the document from time to time. As circumstances change; as beneficiaries age, marry, have children or divorce; and as the trust property appreciates, depreciates, or changes form (for example, if shares of a business are sold), the applicable trust provisions often change as well.
Probably the best advice is: Don’t assume the words mean what they seem. Ask your lawyer!