How a Trust Is Created: Formation Requirements

The three roles

• Settlor (also called grantor or trustor): the person who creates the trust and transfers property into it.
• Trustee: the person who holds legal title to the trust property and manages it under the trust terms.
• Beneficiary: the person who benefits from the trust property.

One person can hold more than one role. For example, in a typical revocable living trust, the settlor is also the first trustee and the first beneficiary, and other people are named to take over later.

Ways to create a trust

Under Uniform Trust Code § 401, a trust can be created by transferring property to a trustee, by the owner declaring that they hold property as trustee, or by exercising a power of appointment in favor of a trustee. California lists similar methods in Probate Code § 15200, and it adds a trust created by will and an enforceable promise to create a trust.

What a valid trust requires

Under Uniform Trust Code § 402(a), as Maine and other adopting states enacted it, a trust is created only if:

• the settlor has capacity to create a trust;
• the settlor indicates an intention to create the trust;
• the trust has a definite beneficiary, or is a charitable trust, a trust for the care of an animal or another permitted purpose trust;
• the trustee has duties to perform; and
• the same person is not the sole trustee and sole beneficiary.

The last requirement reflects the merger doctrine. If one person holds all the legal and all the beneficial interest, there is no one to whom the trustee owes duties, so no trust exists. See who can represent a trust in court for why this matters.

Writing and signatures

Many trusts of personal property can be created without a writing. However, trusts of land usually need one. For example, California Probate Code § 15206 says a trust in relation to real property is not valid unless it is shown by a written instrument signed by the trustee, or by a written instrument conveying the property signed by the settlor, or by operation of law. In practice, almost every trust should be in a signed writing, and a signature that is notarized makes later recording and banking easier.

Details that matter in the trust document

• The full names of the settlor, the initial trustee and each successor trustee.
• The beneficiaries, what each receives and when, and what happens if a beneficiary dies first.
• Whether the trust is revocable or irrevocable. See revocable vs. irrevocable trusts.
• The trustee’s powers, including powers to sell, invest, borrow and hire professionals.
• Spendthrift terms, distribution standards and who may remove or replace a trustee.
• The governing state law and the trust’s name and date.
• A schedule of the property placed in the trust.

Funding: putting property into the trust

Signing a trust document does not by itself move property into the trust. Instead, the settlor has to transfer title: a deed to the trustee for real estate, retitled bank and brokerage accounts, and assignments for other property. Property left outside the trust may have to go through probate. In California, a court may confirm that property belongs to a trust when the settlor clearly intended it, under Probate Code § 850 and Estate of Heggstad, 16 Cal.App.4th 943 (1993), but funding the trust properly avoids the need.

Trust law is state law. More than 30 states have adopted versions of the Uniform Trust Code, while others, including California, have their own trust codes. Read your state’s statute, and talk to a licensed estate planning attorney before you sign or fund a trust.

Researching how a trust is created: formation requirements in your state

First, find the statute or rule that governs how a trust is created: formation requirements where you live. State law controls most of these questions, so the answer can change from one state to the next. Next, read recent decisions from the appellate courts in your state. They show how judges apply the law today. Also, check the local rules of the court that would hear your case. Our state procedures guide links to each state’s official rules. In addition, the Research Center explains how to confirm a source is still good law.

Sources and further reading

Official sources used on this page:

• legislature.maine.gov
• california.public.law
• california.public.law

Related reading on Lawtopolis:

• Revocable vs. Irrevocable Trusts
• Protecting Property in a Trust
• Common Law Trusts and Unincorporated Trusts