What is "Trust"?

Trust is an entity created to hold assets for the benefit of certain persons or entities, with a trustee managing the trust (and often holding title on behalf of the trust). Most trusts are founded by the persons (called trustors, settlors and/or donors) who execute a written declaration of trust which establishes the trust and spells out the terms and conditions upon which it will be conducted.  The declaration also names the original trustee or trustees, successor trustees or means to choose future trustees. The assets of the trust are usually given to the trust by the creators, although assets may be added by others. During the life of the trust, profits and, sometimes, a portion of the principal (called "corpus") may be distributed to the beneficiaries, and at some time in the future (such as the death of the last trustor or settlor) the remaining assets will be distributed to beneficiaries.

A trust may take the place of a will and avoid probate (management of an estate with court supervision) by providing for distribution of all assets originally owned by the trustors or settlors upon their death.

COMPLEX V. SIMPLE TRUST:

If a trust is neither an association nor a grantor trust (at least in part), the trustee must determine whether the trust is a complex trust or simple trust. This determination affects the allocation of income between the trust and the beneficiaries and the exemption available to the trust. This is not a one-time characterization, and there is no option by the trustee in selecting which treatment to apply, such as exists in the "check-the-box" regulations pertaining to corporate v. partnership tax treatment. Instead, each year the trust must be analyzed to determined whether it is complex or simple. All trusts that do not qualify as simple trusts (and all estates) are classified as complex trusts.

A trust is a simple trust if it meets three requirements in Code Section 651(a). First, the terms of the trust agreement must provide that all of the fiduciary accounting income is distributed currently. "Fiduciary accounting income" is generally based on the applicable principal and income allocations under state law. Second, the terms of the trust agreement must not provide for any amounts to be paid, permanently set aside, or used for charitable purposes specified in Code Section 642(c). Third, the trust must not actually distribute any amounts during the year other than the fiduciary accounting income required to be distributed currently.

OBSERVATION: The income distribution requirement is satisfied as long as the distributions of income must be made not less frequently than annually. Reg. Section 1.651(a)-2. As to fiduciary accounting income, while state principal and income allocations are a beginning point, the trustee is allowed to vary some of the allocation rules, such as depreciation allocations and stock dividend treatment. However, the trustee cannot fundamentally depart from the principal and income allocation concepts of applicable law.

For purposes of determining whether all income is required to be distributed currently, it is immaterial that the amount of income allocated to a particular beneficiary is not specified in the trust document. For example, if the fiduciary is required to distribute all the income currently, but has discretion to "sprinkle" the income among a class of beneficiaries, or among named beneficiaries, in such amount as he may see fit, all the income is required to be distributed currently, even though the amount distributable to a particular beneficiary is unknown until the fiduciary has exercised his discretion. It also follows that there does not need to be only one ascertainable beneficiary. Reg. Section 1.651(a)-2(b).

If, in one taxable year, trust income is required or permitted to be accumulated, and in another taxable year its income for the year is required to be distributed currently (and no other amounts are distributed), the trust is a simple trust for the latter year. For example, a trust under which income may be accumulated until a beneficiary is 21 years old, and thereafter must be distributed currently, is a simple trust for taxable years beginning after the beneficiary reaches the age of 21 years in which no other amounts are distributed. Reg. Section 1.651(a)-2(c).

Types of Trusts:

There are numerous types of trusts, including “revocable trusts” created to handle the trustors' assets (with the trustor acting as initial trustee), often called a "living trust" or "inter vivos trust" which only becomes irrevocable on the death of the first trustor; "irrevocable trust," which cannot be changed at any time; "charitable remainder unitrust," which provides for eventual guaranteed distribution of the corpus (assets) to charity, thus gaining a substantial tax benefit.  There are also court-decreed "constructive" and "resulting" trusts over property held by someone for its owner. A "testamentary trust" can be created by a will to manage assets given to beneficiaries. The following is description of some of the most common types of trusts

Living trust

sometimes called an inter vivos (Latin for "within one's life") trust, a trust created by a declaration of trust executed by the trustor or trustors (also called settlor or settlors) during his/her/their lifetime, as distinguished from a "testamentary trust," which is created by a will and only comes into force upon the death of the person who wrote the will. A living trust should not be confused with a "living will," which provides for medical care decisions when a person is terminally ill. While a living trust is a generic name for any trust which comes into existence during the lifetime of the person or persons creating the trust, most commonly it is a trust in which the trustor(s) or settlor(s) receive benefit(s) from the profits of the trust during their lifetimes, followed by a distribution upon the death of the last trustor (settlor) to die, or the trust continues on for the benefit of others (such as the next generation) with profits distributed to them. There are other types of living trusts including irrevocable trust, insurance trust, charitable remainder trust and some special- ized trusts to manage some parts of the assets of a person or persons

Constructive trust

when a person has title to property and/or takes possession of it under circumstances in which he/she is holding it for another, even though there is no formal trust document or agreement. The court may determine that the holder of the title holds it as constructive trustee for the benefit of the intended owner. This may occur through fraud, breach of faith, ignorance or inadvertence

Resulting trust

a trust implied by law (as determined by a court) that a person who holds title or possession was intended by agreement (implied by the circumstances) with the intended owner to hold the property for the intended owner. Thus, the holder is considered a trustee of a resulting trust for the proper owner as beneficiary. Although a legal fiction, the resulting trust forces the holder to honor the intention and prevents unjust enrichment. Example: Mahalia leaves $100,000 with her friend, Albert, while she is on a trip to Europe, asking him "to buy the old Barsallo place if it comes on the market." Albert buys the property, but has title put in his own name, which the court will find is held in a resulting trust for Mahalia. A resulting trust differs from a "constructive trust," which comes about when someone by accident, misunderstanding or dishonesty comes into possession of property belonging to another

Testamentary trust

a trust created by the terms of a will. Example: "The residue of my estate shall form the corpus (body) of a trust, with the executor as trustee, for my children's health and education, which shall terminate when the last child attains the age of 25, when the remaining corpus and any accumulated profits shall be divided among my then living children." A testamentary trust differs from an "inter vivos" or "living" trust, which comes into being during the lifetime of the creator of the trust (called trustor, settlor or donor), usually from the time the declaration of trust is signed

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