Definition of trust agreement

Written by erika johansen
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Definition of trust agreement
A trust is a legal instrument used to dispose of assets. (signing a contract image by William Berry from Fotolia.com)

A trust agreement is a signed document that establishes a trust. A trust is a structure in which legal title to property is transferred from the owner (the "settlor") to another party (the "trustee"), who will then administer the property for the benefit of a third party (the "beneficiary").

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In General

A trust agreement can create a trust that is either revocable or irrevocable during the life of the settlor. State law requirements for trust execution vary, but generally, the trust agreement must be in writing and signed by the settlor. Sometimes the trust agreement stipulates precisely how the trustee is to use the property; this is known as a mandatory trust. But if the agreement grants the trustee some discretion on how and when to distribute the trust res to the beneficiaries, the trust is known as a discretionary trust.

Intent Requirement

A trust will only be valid if the language of the agreement indicates the settlor's clear intent that the trustee hold the property "for the use and benefit" of another. The language used can be variable, but this intent must be present. Precatory language (language that indicates only an expressed hope that the prospective trustee will use the property for benefit of the beneficiary, but leaves the trustee legally free to do as he pleases) will not establish an enforceable trust; the trustee's obligation to manage the property for the beneficiary must be legal, not personal or moral.

Res Requirement

A valid trust agreement must generally specify some defined, already-existing property of the settlor that the settlor wishes to place in trust; this property is known as the "res" of the trust. Earlier trust law held that a trust res could not be an expectation interest (meaning property not yet attained); however, many jurisdictions now hold that a settlor can place in trust inchoate interests, such as future earnings from a current contract. Modern courts will generally also enforce trusts funded with a pour-over will; in such trusts, the trust remains unfunded until the settlor dies and his will becomes operative, leaving property to the trust.

Operation of Trust

A trust vests legal title to the res property in the trustee, but the equitable title (meaning the right to receive benefits) in the beneficiary. The trustee has a fiduciary duty to administer, invest and manage the property for the good of the beneficiary. Once the settlor has relinquished all control of the property, it becomes very difficult for the settlor's creditors to reach the res.

Changes to Agreement

Trust agreements can generally be changed (or even terminated) so long as the settlor is still alive. Even an irrevocable trust can usually be modified with the consent of the settlor and all beneficiaries. However, if the settlor has died, jurisdictional law varies. England, for instance, allows the beneficiaries to exercise considerable control over the trust once the settlor has died. However, most U.S. law follows the Claflin Doctrine, which prohibits any modification or termination of the trust if such change contravenes the clear intent of the settlor. If a deceased settlor has evinced a clear intent in the trust agreement that the trust operate perpetually, it is difficult, if not impossible, to challenge that operation in U.S. courts.

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