[7] Where a document contains obnoxious, unworkable, impractical, or outdated language, the beneficiaries and trustees have recourse to local courts having general jurisdiction in equity – most commonly for a declaratory judgment, judicial construction or reformation of the trust to bring it into compliance with the original intent of the settlor.
In many instances where a revocable living trust is involved, one person can serve as grantor, trustee and beneficiary simultaneously until they die.
In most cases, all the court must find is that there has been a "substantial change in circumstances" in which removal would "best [serve] the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.
Typically corporate trustees will have integrated their fiduciary organization into their investment management or private banking groups.
As the UPIA states, "Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight.
"[43] Among the factors a trustee may consider in formulating the investment strategy and the asset portfolio are (1) general economic conditions; (2) the possible effect of inflation or deflation; (3) the expected tax consequences of investment decisions or strategies;(4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property; (5) the expected total return from income and the appreciation of capital;(6) other resources of the beneficiaries; (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and (8) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
"[44] One of the primary guiding forces in the UPIA is the emergence of modern portfolio theory and the concept of correlations in the performance of various asset classes.
[56] This usually involves business transactions outside of the trust relationship but again may have the "appearance of impropriety" due to the trustee's power over assets to which the beneficiary may have a right.
[58] This prime rule has been gradually moderated over time, based on the law's recognition that in many cases, corporate trustees engage in transactions necessarily because they are in a for-profit business.
Although the UTC limited the reporting requirements to trustees accepting duties after the Code's enactment,[73] a number of states have changed the standard UTC language, often in response to concerns from corporate trustees of the unwieldiness of such requirements and the danger that future trust beneficiaries may interfere and create contention concerning the operation of the trust.
The purposes and uses of trusts historically had to do with management of property in absence of owner, mostly during medieval times when a lord left to fight in battle.
Trusts are generally unique in that they can provide comprehensive asset management for multiple family generations over great spans of time, something which other estate planning devices cannot completely replicate.
Trusts can hold title to a virtually infinite number and type of disparate assets, from publicly traded securities, to illiquid closely held business interests, to real estate, to even collectibles and tangible personal property.
The third-party management of property for the benefit of another is especially valuable for persons who have some form of incapacity, infirmity or are simply unwise with the use of money.
This is usually for good cause – drug abuse, demonstrated inability to hold onto money, fear of divorce, criminal activity, a wish to see the funds go to grandchildren rather than one's own children, etc.
Particularly in cases where a corporate trustee is used, the grantor and subsequent beneficiaries receive the benefits of a vast array of financial services – portfolio management, real estate and business management, bill paying, insurance claim processing, tax and legal assistance, and financial planning just to name a few.
Revocable living trusts were often touted and marketed as valuable solely because of their ability to "avoid probate" and the costs and complications that surrounded it.
[74] Naturally, this rate is a huge inducement among many with substantial wealth to use various estate planning devices to reduce or eliminate the effect of the tax for their family.
This language is relatively broad in its practical application; however, the IRS has agreed it is a sufficient limitation to allow the "credit shelter" trust not to be counted in the estate of the second spouse when she dies.
Typically, these irrevocable trusts are funded with assets that are often highly appreciated, meaning their cost basis for capital gains tax purposes is very low relative to their current fair market value.
In many cases, when properly structured, the CRUT can provide enough tax benefits to beneficiaries through the use of the annuity interest to justify the "giving away" of the asset to charity.
The document then requires the trustee to pay to the settlor a specific sum of money (the annuity) at certain intervals during the life of the trust.
Here's a typical case: settlor owns large block of low cost basis stock in a publicly traded company.
The document calls for the smallest legal interest rate (published monthly by the Federal Government), which is then paid through the term of the trust.
Upon the termination of the trust, the annuity has been paid back to the grantor and the remaining corpus is delivered to the remaindermen (typically children) without tax.
Occasionally, the intent to create a trust is manifested not by a writing per se but by the circumstances in which the "grantor" has entrusted the care of property to another party.
[85] Again, such devices are generally rare and are created as the result of a court-imposed equitable remedy due to litigation between parties as to the "ownership" of certain property.
The Code, in section 411, permits the modification or termination of a non-charitable irrevocable trust if: (a) the grantor and all beneficiaries consent and (b) a court of proper jurisdiction approves it.
The key is whether the beneficiaries that may "stand in" and bind the distant beneficiaries is whether they have a "substantially identical interest with respect to the question...."[114] The Code permits a court to reform (or terminate) non-charitable irrevocable trusts to essentially make them work better, to fix a problem that has developed due to changes in the law or surrounding circumstances, or simply correct mistakes in the trust.
If the change is due to "unanticipated consequences", the court's goal under the code is to fix the problem "in accordance with the settlor's probable intention.