Creation of a Private Trust

• Author: Browne C. Lewis
• Pages: 46-70

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Chapter 2 - Creation of a Private

Trust

The two major categories of trusts are private trusts and charitable trusts. This

chapter set forth the elements necessary to create a valid private trust. The creation of

charitable trusts will be discussed in Chapter Eight. There are no magic words that the

settlor has to use in order to establish a trust. If it looks like a trust and functions like a trust,

it is a trust regardless of what the testator calls it. First, the testator must manifest the intent

to create a trust by vesting the beneficial ownership of property in a third party or in the

settlor for the benefit of another. Second, the trust instrument must name ascertainable

beneficiaries. The class of beneficiaries must be so described that some person might

reasonably be said to answer the description. Third, the trust must be funded with property.

There must be an identifiable trust res or corpus. Any form of property, including stocks,

real property, mortgage securities, easements, causes of actions, can be the corpus of a trust

as long as the settlor has an interest in the object. In general, a trust does not have to be in

writing to be valid. Thus, the settlor can create an oral trust. However, the Wills Act

mandates that a testamentary trust be in writing, and the Statutes of Fraud requires an inter

vivos trust of land to be in writing. As a result, the only trust that can be oral is a trust that

disposes of personal property. Proving the existence of such a trust is difficult because the

parole evidence rule limits the extrinsic evidence that can be admitted to prove the terms of

the trust.

1.2 Intent to Create a Trust

It is not enough just for the settlor to use the word trust. The test is whether the

settlor indicated that she intended to establish a trust relationship. Consider the following

illustrations.

(a) “I leave my lake cabin to Tresmal in trust provided that he pays his brother, Alonzo,

$50,000.” The testator has not established a trust. He has created an equitable charge. If a

testator grants property to a person, subject to the payment of a specific sum of money to a

third party, the testator has created an equitable charge. An equitable charge is similar to a

trust in that in each case the legal title to the property is vested in one person and the other

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persons has an equitable interest in the property. However, the equitable imcumbrancer has

only a security interest in the property; the beneficiary of a trust is the equitable owner of the

property. Further, the holder of the equitable charge does not owe a fiduciary duty to the

third party. In the trust situation, the trustee owes such a duty. The relationship between the

holder of the equitable charge and the beneficiary is more in the nature of a debtor and

secured creditor. In this case, Tresmal is not holding the lake cabin or the $50,000 for the

benefit of Alonzo. Alonzo has a security interest of $50,000 in the lake cabin. Thus, if

Tresmal fails to pay Alonzo the $50,000, Alonzo can file suit to force Tresmal to sell the lake

cabin to get the money to pay him the $50,000. If a trust was created, Alonzo’s remedy

would be to sue Tresmal for a breach of his fiduciary duty.

(b) “I leave my house located at 215 Chestnut Street in trust to LaNitra with the hope that

she will provide her sister, Kaylan, with a place to live during her lifetime.” The testator has

not established a trust. The testator lacked the intent to create a trust because she did not

impose legally enforceable duties on LaNitra. She has made an outright gift of the house to

LaNitra. Kaylan has no interest in the house. This is not a legally valid trust because the

language “with the hope” is precatory language which creates a presumption that the testator

intended to imposed only an unenforceable moral obligation on LaNitra. Kaylan can

overcome the presumption by presenting clear and convincing evidence that the testator

intended for LaNitra to have a legal obligation to let Kaylan live in the house. Courts have

held that words like hope, wish and desire are precatory words.

(c) “I leave $400,000 to Emma in trust provided that she repays me in two years.” The

testator has not established a trust. Her intent was to create a debtor-creditor relationship

between herself and Emma. A trustee is obligated to hold specifically defined property for

the benefit of a third party. The trust property must be kept separate from the trustee’s own

funds. A debt involves a personal obligation to pay a sum of money to another. The crucial

factor in distinguishing between a trust relationship and an ordinary debt is whether the

recipient of the assets is entitled to use the property as his own and to comingle the property

with his own assets. In this case, Emma has no obligation to use the money for the benefit

of a third party. Her only obligation is to repay the money. Thus, instead of owing a fiduciary

duty to a third party, Emma’s sole duty is to repay the testator.

(d) “I leave $300,000 in trust to Bernie to pay the income to Jeremy for life and upon

Jeremy’s death to divide the principle between Jeremy’s surviving children.” Testator has