How a Trust Is Created: Formation Requirements
Almost any adult with capacity can create a trust. Whether the trust is valid, and whether it does what the settlor wants, depends on how it is created and on the details in the trust document.
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Unauthorized practice of law
Practicing law without a license, such as representing another person or entity in court. A non-lawyer trustee who represents a trust with other beneficiaries in court may be practicing law without a license. Each state defines and regulates the practice of law.
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Testamentary trust
A trust created by a will. It takes effect only after the will-maker dies and the will is admitted to probate, so it does not avoid probate.
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Successor trustee
The person named in a trust to take over as trustee when the current trustee dies, resigns or becomes unable to serve. In a revocable living trust, the successor trustee usually takes over when the settlor dies or becomes incapacitated.
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Grantor trust
For federal income tax purposes, a trust whose income is taxed to the grantor (settlor) because the grantor keeps certain powers or interests, under 26 U.S.C. §§ 671 to 679. A revocable trust is usually a grantor trust.
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Domestic asset protection trust
A self-settled, irrevocable trust that a state statute allows to protect the settlor’s property from many creditors if strict requirements are met. Nevada, Delaware, South Dakota and Alaska are among the states that allow them. Protection is limited, especially for settlors who live in other states, and transfers made to defraud creditors can still be undone.
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Self-settled trust
A trust in which the settlor is also a beneficiary. In most states, the settlor’s creditors can reach whatever the trustee could pay to or for the settlor (Uniform Trust Code § 505(a)(2)). A few states allow domestic asset protection trusts as a statutory exception.
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Spendthrift clause
A trust provision that stops a beneficiary from transferring their interest and stops the beneficiary’s creditors from reaching it before it is paid out. Uniform Trust Code § 502 recognizes these clauses, and § 503 lists exceptions, such as claims for child support. A spendthrift clause generally does not protect a settlor from the settlor’s own creditors.
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Common law trust
A trust created under the general principles of trust law developed by the courts, rather than under a special statute. Most private trusts fit this description. Calling a trust a common law trust does not exempt it from a state’s trust statutes or from tax rules.
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Tribunal
A court or other body with authority to hear and decide disputes, such as an administrative agency or an arbitration panel.