A trust is a relationship in which one person gives property to another person, called a Trustee, who holds or manages that property for another, the beneficiary. The person who creates the trust is called a few different things: grantor, settlor or trustor. The trustor can be a beneficiary and so can the trustee. However, the trustee cannot be the only beneficiary; after all, if someone gives someone property to manage for themselves, they are just giving the property to them. Trusts can also have more than one trustee appointed. In addition, the people mentioned above can include limited liability companies, corporations, non-profit corporations and other entities. Trusts are flexible arrangements that can be used to protect assets from probate, creditors, and the financially irresponsible.
A trust is almost always represented by a written document, called a trust document. The trust document can be part of a will or it can be a separate document. Trusts can be created verbally, but verbal trusts can be difficult to prove. The trust document generally describes how the trust operates.
Trusts can be created a few different ways. A trust can be created by leaving property to a trustee in a will or naming the trustee as the beneficiary of a life insurance policy or similar benefit plan. A trust can also be created when someone in possession of property declares they are holding property as trustee, usually in a written document – a declaration of trust. In addition, the courts have the power to appoint trustees and create trusts under certain circumstances.
Trusts are said to be revocable or irrevocable. If the trustor has the right to change terms of a trust then the trust is revocable. If the trustor does not retain the right to modify the terms of the trust, then the trust is irrevocable. Revocable and irrevocable trusts are treated differently when it comes to the rights of creditors and taxation.
Trusts are used for a variety of purposes. Trusts created by wills are often used to manage assets that are going to minors. Trusts are created to make it easier for trustor’s to pass assets to others outside of probate. Trusts can be used to manage assets on behalf of someone that needs help managing their affairs. Note, trusts and other important documents should ideally be executed before someone starts showing signs of dementia or senility. Trusts can also be created to serve charitable purposes or to provide for the care of animals. North Carolina law only requires that the purposes of the trust be possible, legal and in agreement with public policy.
Trustees generally have those powers that are given to them by the trustor in the trust document. Generally, these powers include the authority to invest, manage and dispose of the assets in the trust, but the trustor is free to limit the powers of the trustee. Trust documents can be drafted to dictate to whom the trustee can give assets, when, how much, how often, in what form and under what circumstances. Oftentimes, the trustee is simply given broad power to determine how to manage and distribute the assets, but the creator of the trust has a lot of flexibility to determine the authority of the trustee.
Trusts are not the same, nor are they as simple to create as, limited liability companies (LLCs) or business corporations. Trusts are not legal entities unto themselves like an LLC and they are not created by a simple form filing with the North Carolina Secretary of State. Done well trusts can be used to ensure the safety and security of loved ones, but done poorly, they can wind up creating more trouble than anything else.