The reasons why people use trusts are manifold. A client might have a minor child and desire a trusted adult family member to manage the inheritance of the minor child if the client dies before the child reaches a certain age.
For instance, a client might put a trust in her last will and testament (called a “testamentary trust”), appointing her sister as trustee of her minor child’s inheritance until the child attains the age of twenty-five. The terms of the trust might instruct the sister to make distributions of trust assets to the child for the child’s health, maintenance, support, and education. The sister-trustee would make such distributions to or for the benefit of the minor child until the child attains the age of twenty-five. Once aged twenty-five, the trustee would distribute any funds that remain in the trust to the child, and the child would be free to do with the remaining assets what he wanted once the money was distributed to him.
A person might establish a trust because a child is disabled or because a child has drug or alcohol problems. A person might establish a trust because a child simply has difficulty properly managing money and is a spendthrift.
A person might even establish a trust for her own benefit, thinking that having a trust will in some way assist in the management of her own estate during her life, even if she serves as the trustee of her own trust. Some people are simply sold on the idea that the general concept of a trust is a good idea.
A “trust” is an agreement under which one person, the “trustee,” manages the assets of the trust for the benefit of another person, called the “beneficiary.” The trustee manages the assets as a fiduciary of the beneficiary, meaning that the trustee manages the assets with the utmost duty of care to the beneficiary. The person who establishes the trust and puts his assets in the trust is called the “grantor.”
A “revocable trust” is a trust that can be modified or terminated by the grantor without the consent of the trustee of the trust. An “irrevocable trust” is a trust that cannot be modified or terminated by the grantor.
With some trusts, the grantor, trustee, and initial beneficiary are all the same person. For instance, Mr. Smith establishes and funds a trust for his benefit naming himself as trustee. In order to be a valid trust, someone other than Mr. Smith must also be a beneficiary of the trust, so Mr. Smith could name his children as contingent beneficiaries of the trust after his death.
With testamentary trusts, or a trust in a Will, the grantor is the person who creates the Will, the decedent at the time the Will is acted upon. The decedent would have named some to be the trustee and would have named beneficiaries. The beneficiaries might include the person who serves as trustee, but typically the trustee is not the beneficiary of a testamentary trust.
Once a trust has been established, can the trust be modified or terminated? Mr. and Mrs. Smith put their assets in a trust and name themselves and their children as the beneficiaries of the trust. Life goes one and situations change. The terms of the trust, which seemed so well thought-out when they were drafted, now hamper the proper administration of the trust given the current set of circumstances that confront the beneficiaries. Can the trust be modified to conform to these new set of circumstances?
The answer is, yes. Under certain circumstances, a trust, even an irrevocable trust, can be modified to conform to current circumstances. The overarching principle with such a modification is that the trust can be modified to conform to the intent of the grantor in establishing the trust in the first instance. In other words, a court can modify the trust to fulfill the intention of the grantor in establishing the trust.