Estate planning can be confusing. There are very specific terms that sound alike but have different meanings. The concept of trusts is one of the more perplexing aspects of estate planning. Each type of trust is a tool that has a specific function. Learn more to determine which ones are best suited to your situation.
Living trusts are the most common type of trust used in estate planning. A revocable living trust is an excellent estate planning tool. In many cases, it is the primary tool used in estate planning. Living trusts may also be referred to as “inter vivos” which is the Latin phrase for “between living persons.” Living trusts are established during a trustmaker’s lifetime, rather than at their death.
The person who creates the trust
The individual or individuals who have a legal obligation to use trust funds and property for the benefit of the beneficiaries named in the trust agreement
The individual(s) who benefit from the trust and are named in the trust document
The trust agreement or legal agreement between the trustmaker and the trustee that obligates the trustee to use the money and property in the trust in the way stipulated by the trustmaker and for the benefit of the beneficiaries
Living trusts can be revocable or irrevocable. Furthermore, they can be customized to achieve the goals and objectives of the trustmaker.
A testamentary trust is established by the terms of the testator’s (the trustmaker) Last Will and Testament. Testamentary trusts take effect only when the testator dies.
For example, Mike has directed the executor of his estate to establish a trust in his will. This trust may receive some or all of Mike’s estate’s property. In his will, he names his trustee and specifies the terms of his trust. In addition, he has specified which properties will be included in the trust, as well as how the assets will be used or distributed for the benefit of the beneficiaries.
A constructive trust is not really a trust. Unlike other trusts, it is not used for estate planning. Instead, it is best described as an equitable remedy imposed by the court to prevent someone from benefitting from property that has been wrongly obtained. Unlike a living trust or a testamentary trust, there is no fiduciary relationship. A judge may use constructive trusts in a bankruptcy hearing.
Imagine Susan is about to file for bankruptcy. She has property in the Northwest that she hopes to protect. A week before filing for bankruptcy, she transfers ownership of the property to her sister Nancy. She does not disclose this transfer to the bankruptcy court. The court may require that the property be placed in a constructive trust to pay Susan’s creditors, even though Nancy has the title to the property.
Using a constructive trust, the bankruptcy court can prevent Nancy from selling the property for her or Susan’s benefit instead of turning it over to the creditors who had a claim on the property.
These are three examples of trusts that each serve a distinct and sometimes unrelated purpose. The terminology can be confusing. It is partly due to the legal tradition of retaining terms that describe specific legal concepts while adding new terms to illustrate new concepts, even if this is confusing to someone who does not regularly use this terminology.
Constructive Trust, Black’s Law Dictionary (8th ed. 2004).