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What is a Trust?
A trust is a legal arrangement where one person gives legal ownership of property to a second person who is responsible for managing the property for the benefit of a third person. The person who creates the trust is known as the settlor, grantor, or transferor. The person who manages the property is the trustee. The person who benefits from the trust is called the beneficiary.
Trusts are used for many reasons, but people often use them to pass property to their beneficiaries, like wills. In some situations, trusts transfer property faster and cheaper than a will. Trusts are very flexible and can be for a charitable or private purpose. Trusts can be revocable or irrevocable. Trusts can be created in the lifetime of the grantor (a “living” or “inter vivos” trust) or take effect at the death of the grantor (a “testamentary” trust).
The law of trusts goes back hundreds of years and was mostly developed through “common law,” (law developed by court decisions). Maryland also has specific statutes that govern trusts, including the Maryland Discretionary Trust Act and Maryland Uniform Charitable Trusts Administration Act. These laws give specific requirements and forms for trusts. However, Maryland laws do not limit other means of declaring trusts.
Read the Law: Md. Code, Estates & Trusts § 14-404
Uses of a Trust
Trusts can be used for any legal purpose. Some examples of these purposes include:
- management of assets on behalf of family members or children in case their parents are disabled or die;
- protection against creditors;
- eliminating the need for probate;
- minimizing estate and other property transfer taxes;
- control over insurance policies; and
- managing business matters.
Trusts are very popular in estate planning because property that is transferred by trust does not go through probate. the legal process used to validate a will and distribute assets after death. So, the fees related to probate are avoided. Trusts can also be used to lower the estate tax due for married couples with large estates. Trusts are often set up to provide for the health of an individual. Trusts can even be set up to care for a beloved animal after the death of the owner.
Read the Law: Md. Code, Estates & Trusts § 14.5-407
Creating a Trust
To create a trust, the grantor writes a document called a Declaration of Trust. While trusts technically do not need to be in writing, it is almost impossible to execute a trust unless it is in writing.
Read the Law: Md. Code, Estates & Trusts § 14.5-406
In the declaration, the grantor transfers legal ownership of the property to be placed in trust to the trustee and names the beneficiary. The grantor must be legally competent to make the trust.
Read the Law: Md. Code, Estates & Trusts § 14.5-401 and 14.5-402
A trust does not legally exist until a trustee accepts receipt of the property. A trustee may be a person, institution, or other organization. The declaration can include a list of back-up trustees in the event a trustee cannot continue. The trust can be set up with the grantor as the first trustee. Trusts created under the Maryland Discretionary Trust Act assume that the grantor (called the “declarant”) will serve as the trustee.
Read the Law: Md. Code, Estates & Trusts § 14-401
Once a trust is in place, the trustee has the authority, and legal responsibility, to manage and invest the property held in trust for the benefit for the beneficiary. Trustees have a fiduciary duty to the beneficiary, which means they must use reasonable care in managing the property for the beneficiary.
Read the Law: Md. Code, Estates & Trusts § 14-405
The property to be held in trust must be specifically described in the declaration of trust. Though no specific words or actions are required to transfer property into trust, grantors must follow the laws for transferring property. For example, real estate has its own rules for transfer.
Read the Law: Md. Code, Estates & Trusts § 14-404
Trusts Under the Maryland Discretionary Trust Act
Trusts created under The Maryland Discretionary Trust Act must cleary indicate that the property is being held in trust under the Act. If the trust does not say whether it is revocable or irrevocable, trusts under the Maryland Discretionary Trust Act will be assumed to be revocable.
Read the Law: Md. Code, Estates & Trusts § 14-402
The Maryland Discretionary Trust Act includes forms for the creation of a trust under the act. Generally, trusts end as soon as the first of three things happens:
- The beneficiary dies;
- A specific date or event specified in the trust document occurs, OR
- The trustee determines that by judicial, legislative, or administrative action, trust property or income has been or will be determined to be property or an available resource of the beneficiary.
Read the Law: Md. Code, Estates & Trusts § 14-406