Form 1041. Stephen Brooks
to create a trust. For example:Settlor hereby delivers to trustee the assets listed in Schedule A, to be held, invested, and distributed pursuant to the terms of this trust agreement, together with any other property that may be added hereto.
A statement of trust purpose — Sometimes this provision will be omitted, but if it is included in the trust agreement, it will provide valuable guidance to the trustee and the courts as to the settlor's intent as to how the trust should be administrated. For example:It is the settlor's intent in establishing this trust to care for the maintenance and support of his wife before all others, and the trust shall be administered for that purpose.
A statement of revocability or irrevocability — Under the UTC, a trust is revocable unless it states that it is irrevocable. However, the trust agreement should include either of the following provisions to make the intention clear:This trust shall be irrevocable and the settlor hereafter shall have no right to alter, amend, or revoke this trust in any manner whatsoever.Alternatively:This trust shall be revocable and the settlor specifically reserves the right to alter, amend, or revoke this trust at any time.
Dispositive provisions — The dispositive provisions provide how income and principal are to be held and distributed during the term of the trust, and also how and to whom the balance of the trust assets are to be distributed upon the termination of the trust. Here is some illustrative language:During the lifetime of the settlor's wife, the trustee shall pay and distribute to her or for her benefit the entire net income of this trust, of which payments shall be made to her no less frequently than quarterly. In addition, the trustee shall from time to time pay to the settlor's wife, or shall apply directly for her benefit, as much of the principal of this trust as the trustee, in its absolute discretion, may consider desirable for her health, maintenance, and support.Upon the death of the settlor's wife, the remaining balance of the trust shall be distributed outright and free of trust to the settlor's then living issue, in equal shares.
Administrative provisions — The administrative provisions will generally grant powers of administration to the trustees which are in addition to those provided under the governing law. The intention of adding these provisions is to generally facilitate the administration of the trust without unnecessary court involvement.Administrative powers:In addition to the powers conferred on the trustee under 20 Pa. C.S. Section 7780.5, which shall include all of the illustrative powers provided in 20 Pa. C.S. Section 7780.6, the trustee shall have the following powers until all property is distributed:To retain any real or personal property (including stock of any corporate trustee or of a company controlling it) in the form in which it is receivedTo hold property unregistered or in the name of a nomineeTo buy real and personal property from the personal representatives of the settlor's estate, and to lend money to them upon such terms and conditions as the trustee deems advisable, even if the settlor's personal representative is also a trustee of this trust
Trustee provisions — The trustee provisions normally name successor trustees, and also may deal with such matters as procedures for removal of trustees, and how they are to be compensated.Upon the death of the settlor, the settlor's wife, by signifying her acceptance in writing, shall become a trustee hereunder. Any successor trustees shall have all the powers conferred upon the originally named trustees except those powers expressly limited to the disinterested trustee.
Governing and situs — This provision will establish the situs of the trust, and the law which shall govern the administration of the trust:The situs of this trust shall be the Commonwealth of Pennsylvania. Questions pertaining to the validity, construction, and administration of the trusts created under this instrument shall be determined in accordance with the laws of the Commonwealth of Pennsylvania.
How a trust operates
Beginning with the initial funding of the trust, and ending upon the termination of the trust at the point when the trust assets are distributed, the trust assets are subject to the administrative control of the trustee. During the period of administration, the trustee is required to invest the corpus or principal of the trust, and distribute the income and principal of the trust according to the terms of the trust document.
Mr. Wilson wishes to create a trust for the benefit of his grandson, Tim, age 18, to assist in funding Tim's education. Mr. Wilson has his lawyer draft a trust agreement consistent with this purpose. The terms of the trust as provided in the trust agreement state that Mr. Wilson's friend Steve is appointed trustee of the trust.
During the term of the trust, the $100,000 is to be invested by the trustee, and the trustee is to distribute trust income at least annually to Tim. The trustee may also distribute trust principal if needed to provide for Tim's “educational needs, as deemed appropriate by the trustee.” The trust is to terminate and the remaining trust balance is to be distributed outright and free of trust to Tim, upon Tim attaining his 21st birthday.
Upon execution of the trust document, Mr. Wilson transfers $100,000 to the trust by writing a check for $100,000 to “Mr. Steve, as trustee of the trust established for the benefit of Tim.” Mr. Steve establishes an investment account with ABC Bank, in the trust name, and deposits the check. A tax identification number is obtained on behalf of the trust. The $100,000 originally funding the trust makes up the original corpus or principal of the trust. Mr. Steve invests the $100,000 in a certificate of deposit paying 3 percent interest a year. The interest earned will be the income of the trust.
The trustee must make distributions to Tim as provided in the trust document — therefore income must be distributed on an annual basis, and principal if needed for the “education” of Tim. Each year, Steve distributes the interest income earned by investment of the trust principal. At age 20, Tim enrolls in college, and the trustee pays the first-year tuition from the principal of the trust. Steve is not permitted to distribute principal for any other purpose than as provided in the trust, until Tim reaches age 21, at which point the trust is to end and the remaining trust balance is to be distributed to Tim.
In addition, the trustee has a duty to keep adequate records of administration of the trust assets and to respond to requests for information related to the trust's administration. During the term of the trust, the trust is a taxpayer and Steve must file tax returns on behalf of the trust. The income earned by the trust must be reported on that tax return.
In addition, there will be costs incurred by the trust, such as the trustee's compensation and accounting fees. Similar to individual taxpayers, these costs may be deductible for tax purposes on the trust's tax return when determining the trust's taxable income.
Definitions
The following definitions are relevant to trusts:
Trustee — One who stands in a fiduciary or confidential relation to another; especially one who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary.45
Settlor, grantor, trustor — Someone who creates a trust.46
Beneficiary — A person for whom benefit property is held in trust.47
Revocable trust — A trust in which the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income.48
Irrevocable trust — A trust that cannot be terminated by the settlor once it is created.49
Principal — The corpus of the trust.50