Trust is a special type of agreement whereby property is managed by one person for the benefit of another. Trust involves three characters in play:
- Settlor or Grantor, who creates trust and entrusts his property.
- Trustee, fiduciary that manages and hold the property for the benefit of the beneficiary,
- Beneficiary, who is an equitable owner of trust property.
Trust may be created for any lawful reason and more often than not that reason is controlling when and how young beneficiaries receive their inheritance. No consideration is required for the creation of a trust. Assets characteristically transferred to a trust included: property, bank accounts, vehicles and non-titled assets such as art, jewelry, etc. Assets as life insurance and annuities typically name trust as a beneficiary.
Trust can be created during the creator’s lifetime (“living trust”) or by will (“testamentary trust”).
Usually the Settlor expressly states duration of the trust however trust may only exist for a definite time and have to be in frames of Rule Against Perpetuities. Exception to this rule would be charitable trusts that may function for indefinite time and benefit unidentifiable individuals. Settlor may determine a date of termination of the trust or an event upon occurrence trust would be terminated. Settlor may also reserve a right to revoke or modify trust.
There are certain cases when trust may be terminated without settler’s permission. When beneficiary expressly relinquish his interest, or it is impossible to accomplish a purpose for which trust was established. For example: when trust was created to support of medical charity against one of the diseases that was soon after cured.
In NY all trusts are irrevocable and unamendable, unless otherwise expressly stated in the trust instrument. Settlor may be allowed terminate an irrevocable trust only if all beneficiaries have given consent. In situation when beneficiary is a minor or incompetent, trust cannot be terminated.
NY allows individuals protect themselves from liability by Statutory Spendthrift Rule. According to this rule beneficiary’s interest in trust protected from creditors by prohibiting voluntary or involuntary transfer of the beneficiary’s interest. All irrevocable transfers of assets in trusts are automatically given spendthrift protection by statute as long as such transfers are not in fraud of existing creditors.
However when Settlor of the trust is also the income beneficiary spendthrift protection does not apply. And when there is a revocable trust created creditors can reach entire property.
There are also other exceptions to the Spendthrift Rule umbrella:
- Creditor who furnishes necessaries (including rent)
- Child support, alimony
- Federal tax liens
