Christopher Stoneman Estate Planning Articles

VI - Trusts

'Put not your trust in money,
but put your money in trust."

The figurative if not the physical lintel over the doorway of Trust Company of Vermont, like that of every other red-blooded American trust company, might well have Oliver Wendell Holmes’ advice* as its inscription. In this article we will attempt the well-nigh impossible - to make a brief introduction to one of the bedrock concepts of Anglo-American jurisprudence that it took Professor Austin Wakeman Scott of the Harvard Law School over a dozen erudite volumes to inventory:  the trust.

*   The Autocrat at the Breakfast Table (1858). 

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Simply put, the trust is a tripartite arrangement - a trinity composed of  the settlor, the trustee and the beneficiary.  The settlor (known variously as the grantor, the trustor or the donor) places property (the res or corpus, as some are wont to call it) into the trust by transferring it to the second person, the trustee; and the trustee then holds it in trust (together, in many cases, with subsequent, more sizeable additions) for the benefit of the third participant, the beneficiary (the cestui que trust, as antiquarian attorneys are sometimes heard to mumble). Over the years a huge body of law has developed, spelling out the rules which govern the operation of trusts.

A trust may be express or implied.  If the latter, it arises by operation of law rather than by the explicit direction and agreement of the parties and results from the imposition of a trust in a situation where, for example, fairness or equity requires that property be held and/or administered for the benefit of another. Implied trusts may be either constructive* trusts or resulting** trusts.
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*  One often-cited Vermont case illustrates the constructive trust:  Mrs. Mahoney shot her intestate husband to death and the probate court awarded the late Mr. Mahoney’s modest estate to his parents and not to his widow (who would in the normal situation be his sole heir - the Mahoneys were childless).  Not surprisingly, this did not sit well with the Vermont Supreme Court.  While acknowledging that the probate court lacked the jurisdiction to impose a constructive trust on the decedent’s estate, the Supreme Court sent the case back down for further adjudication by the ancillary court of chancery which was not so handicapped.  In re Estate of Mahoney, 220 A. 2d 475 (1966).  Vermont later adopted a statute specifically providing for forfeiture of a killer’s share in the estate of anyone whom he has intentionally and unlawfully killed.
**  The resulting trust arises, for example, “where an express trust fails or makes an incomplete disposition.”  Dukeminier & Johanson, Wills, Trusts and Estates, 584 (6th ed. 2000).

Our primary focus in this article, however, is to be on the more prevalent  express trust, whose terms are either set out in the trust agreement which the grantor and the trustee (but not the beneficiary) both sign or, in the case of a testamentary trust, in the will, signed only by the testator.  These terms give the trustee its marching orders: tell it  who is the beneficiary and how much he, she or they are to receive, at what intervals, for how long and upon what conditions they are to receive it, and whether it is to be paid out of income (interest, rents, dividends, etc.) or principal or out of both.

The cast for this arrangement does not necessarily require three separate participants.  It can be undertaken by just two (where the grantor and the trustee are one and the same person, and they are acting for the beneficiary) - take, for example, the doting parent who declares that he is holding 1,000 shares of the XYZ Corporation stock as trustee for his daughter until his death, at which time she will take everything free and clear of trust.

Still more fancifully, the arrangement can  even be made to emulate Alec Guinness’s Kind Hearts and Coronets with one person acting in all three capacities: grantor, trustee and beneficiary.  For example, the Vermont owner of land in another state, wishing to avoid an ancillary probate, deeds that land to herself as trustee of a revocable trust for her exclusive benefit for life, with the remainder to go to her estate at her death.  She has acted as grantor, trustee and beneficiary all at the same time. And it should be noted - although beyond the scope of this discussion - that despite the fact that it only involves one individual and could be said to have something of a “Mickey Mouse” ring to it - this kind of arrangement can and does produce significant legal consequences.

In cataloguing some at least of the various situations in which an express trust may be a key estate planning mechanism, we may conveniently utilize the two main categories into one or the other of which all express trusts must necessarily fall: revocable trusts and irrevocable trusts.
In the case of the revocable trust the grantor may make amendments to the initial instrument or even, if she so chooses, completely revoke the arrangement.  Second thoughts and refinements are possible, bridges have not been burned.  With the irrevocable trust, however, there is normally no chance for reflection and reconsideration; the die is cast and trust provisions remain in effect for their stated term in the form in which they were originally stated.  It goes without saying, therefore, that although irrevocable trusts can certainly have their uses, they should be established only after the most careful consideration of the tax and other consequences. The rule in a majority of states is that where a trust agreement says nothing about its revocability or irrevocability, it is deemed to be irrevocable.

Revocable trusts.  One of the commonest uses of the revocable trust is as a vehicle for probate avoidance.  This has already been discussed in Article V.  It will be worth repeating, however, that such a trust is effective as a probate avoidance device only if and to the extent that the trust is actually funded during the prospective decedent’s lifetime.

Another very important use of the revocable trust is as a vehicle for the cautionary protection of the grantor when age or infirmity threaten and the continued management of a portfolio - or even perhaps of a business - becomes  too cumbersome for capable or comfortable  handling.  Retention of the right to revoke is reassuring, perhaps essential, in terms of personal peace of mind as well as ultimate control;  but removal of investment responsibility, the payment of bills, etc. enable the grantor of a revocable trust to concentrate waning stamina on more important matters - travel abroad, the growing of roses, and so forth.

And yet another use of the revocable trust - also touched on in a previous article -  is the elimination of the need for potentially time-consuming and costly ancillary probate in foreign jurisdictions - accomplished by converting real estate, say, or tangible personal property into an intangible interest in a trust.  If, for example, I own a vacation home in the Poconos but am a resident of Vermont, I can handily avoid the need for an ancillary probate proceeding in Pennsylvania by retitling my vacation home in a revocable trust which, without interference with my lifetime enjoyment, will specify what is to be done with the property when I die.*

All considerations of probate avoidance aside, the revocable trust can also be a handy way of directing how one’s estate is to be disposed of.  A grandfather, for example, may open a series of savings accounts for his grandchildren, opening each account in his own name “in trust for” the grandchild in question.**  This not only preserves the account as an asset of the grandfather should he “fall on hard times,” as even grandfathers have been known to do;  it also gives the grandfather the power to pull the rug out from under the putative beneficiary if he or she behaves in such a way as to earn ancestral disapproval.

Irrevocable trusts.  Unlike the revocable trust, which must be a living trust if it is to retain revocability (at least, by the grantor - a third party might be given an independent power to amend or revoke a will trust), the irrevocable trust may appear in a living trust agreement or under a will.  The other trust rules are generally but by no means always the same, whether the trust is of the testamentary or of the living variety.  However, as we have seen***, testamentary trusts are usually subject to a greater degree of court supervision, certainly in Vermont, than their living counterparts.

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*   Of course, the use of the revocable trust may not immunize the foreign real estate from possible death tax in the foreign jurisdiction at my death.
**  Sometimes referred to as Totten trusts after the old New York case In re Totten, 179 N.Y. 112, 71 N.E. 748 (1904), which rejected the argument that such an arrangement was testamentary in nature and should fail because it was not entered into with the formalities required for the execution of a will.
***  Article V - Avoiding Probate.

These primarily tax-flavored devices will be examined in depth in subsequent articles.  But there are of course numerous other situations which may be better served by an irrevocable trust arrangement than by its alternative, the outright gift.  Perhaps, given the timing of his remark, the middle of the 19th century, this is one of the reasons why Oliver Wendell Holmes advised the use of the trust. By using the trust, a donor is obviously better able to anticipate various scenarios that may arise down the road than he could hope to be with an outright donation. On the other hand, the practice of  attempting to rule the behavior of future generations from the grave is one which some most vehemently deplore: the restrictive tying up of large amounts of property for long periods of time, while those to whom additional economic benefits would be truly, and indeed healthfully, empowering are obliged to watch their nest-eggs grow -  yes - but are quite unable to savor so much as the smallest omelet!  Fortunately, there are ways in which the two approaches - of caution and flexibility - may be commingled; not necessarily to the satisfaction of all concerned but with some of the sharp edges sanded down without, to mix the metaphor, the baby being thrown out along with the proverbial bathwater. The power of appointment and the limited right of a beneficiary to invade principal without a trustee’s consent are two such well-tested palliatives, and these will be discussed in some detail in subsequent articles.             

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