In my practice, I draft a lot of trusts. There are various reasons why a trust may be the appropriate solution for a client.
At its core, a trust is a fiduciary relationship. A trust is created when one person of entity, such as a bank, is holding property for another individual or entity. The person holding the property is called the “trustee.” The person for whom the property is being held is called the “beneficiary.”
The written document that many people would call the trust is actually the trust agreement. The trust agreement is the contractual document that establishes the terms of the trust. The trust agreement might say something such as “My trustee shall hold and administer the assets and income of the trust for the health, maintenance, and support of my son, the beneficiary of this trust.” The agreement tells the trustee what to do with the assets of the trust, that is, hold the assets for the son’s health, maintenance, and support.
The person who has the trust agreement drafted and who places the assets in the trust is called the “grantor” or “settlor.” The grantor typically goes to an attorney and hires the attorney to draft the trust agreement, then the grantor places his assets in the trust for the trustee to hold for the benefit of the beneficiary.
There are many reasons why a grantor might establish a trust. For instance, the grantor may be a father who has a son who has issues with drugs or alcohol, or the grantor might have a son who cannot effectively manage money, or the grantor might have a son who is disabled. For any one of these reasons, the grantor might want to establish a trust.
Let’s assume that Mr. Smith has a disabled son, aged 30. Mr. Smith wants to establish a special needs trust for his son. The son receives government entitlement benefits, such as Medicaid, so it is important that Mr. Smith choose a trustee who knows the Medicaid program and how the trust might affect the son’s eligibility for Medicaid. The proper administration of such a trust is important, because an incorrect distribution from the trust could negatively impact the son’s entitlement to Medicaid benefits.
The father/grantor might want to choose a professional trustee, such as a bank, to administer the trust. Since the son is receiving Medicaid benefits and since the son might live for decades after the father’s death, Mr. Smith wants a trustee who understands the Medicaid program and who will be around for a long time after he dies. A bank is the logical solution for both of these issues.
Banks typically have trust departments. Many of these trust departments are very familiar with administering trusts and administering trusts in a manner that does not negatively impact government entitlement benefits. Moreover, a bank is an entity, not an individual, so a bank does not die. A bank can “live” for hundreds of years.
A problem that might arise in choosing a professional trustee, or any trustee for that matter, is that there may come a point in time when it would be good to remove the trustee. Perhaps the trustee and the beneficiary aren’t getting along. Perhaps a better trustee comes into being, such as a new organization that administers trusts.
A trust protector is a person or entity who is given the authority to remove a trustee and replace the trustee with another trustee. Typically, the trust protector cannot choose himself to be the trustee or someone who is related to him.
By naming a trust protector, the grantor can build in protection for the beneficiary in the event that a trustee needs to be replaced for any reason that the trust protector deems appropriate. Knowing that he/they can be removed, also tends to keep the trustee on their toes.