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Legal Trusts - What You Need to Know

What exactly is legal trust? And how do they work? Trust & Will explains what you need to know about legal trusts.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Trusts are a powerful legal instrument in Estate Planning and when properly set up can provide a number of benefits. Not only can Trusts help you establish future financial support for your loved ones, they can also give you peace of mind about your own financial affairs. That being said, there are a few steps that go into creating legal Trusts that you must keep in mind. 

Because Trusts are legal entities, the creation process involves specific requirements. These rules are in place to ensure the Trust has been properly established and registered according to state laws. If you are interested in any of the benefits Trusts have to offer, keep reading to learn what makes a Trust legal: 

What is a Legal Trust? 

A legal Trust is an entity that has been created through a Certificate of Trust or Trust Agreement, properly funded with assets, and registered with the appropriate office in the state it is incorporated. Legal Trusts are sometimes referred to as valid Trusts. 

At its core, a Trust is a legal entity that holds assets on behalf of the Settlor and is managed by a designated Trustee. The assets can then be distributed to a Beneficiary according to the documents of the Trust. There are numerous reasons to create a Trust -- but the important thing to remember is that the correct steps must be followed to ensure its validity. 

What is the Purpose of a Legal Trust?

The purpose of a legal Trust can vary from person to person, but in general they are created to hold property or assets on behalf of the Settlor. The structure of a Trust can provide a number of financial and legal protections, and allows the included assets to be managed separately from the Settlor’s own finances. This can provide a sense of security, as well as an additional layer of privacy about one’s finances. 

The assets in a legal Trust are distributed according to the founding documents, allowing the Settlor to dictate how and when funding is given to the beneficiaries. For example, the Trust may provide support to a child after they graduate college or get married. 

Legal Trusts can also minimize tax obligations and allow families to pass more wealth onto future generations. This is because assets within a Trust are taxed as a step-up in basis, as opposed to a typical cost basis.  Further, Trusts allow assets to avoid probate and are therefore exempt from the same type of Estate taxes  that would apply to the rest of the Settlor’s assets. 

What are the Requirements for a Trust to be Valid?

There are a few requirements for a Trust to be valid, but luckily they are relatively straightforward. By working with an experienced Estate Planning lawyer you can ensure your Trust creation documents are created and registered properly. Here are the requirements for a legal Trust: 

  • There must be clear intent to create a Trust by the Settlor.

  • The Settlor must own property or assets to be transferred to the Trust at the time of its creation.

  • The Trust must be created for legal purposes. For example, the Trust cannot be used to shield property from creditors or to illicit illegal activities.

  • The creation documents, called a Deed of Settlement or Declaration of Trust, must identify the subject matter and assets for the Trust.

  • The beneficiaries must be clearly named in the founding documents.

  • The creation documents must state rights and duties for the Trustee, or person managing the assets in the Trust

  • Property or assets must be legally transferred to the Trust, where they are managed by the Trustee (This process is sometimes called “delivery”).

  • The Trust must be validly executed according to state law. This could include formalizing the transfer of assets in writing or registering the Trust with the state. 

Trust Registration by State - Does A Trust Have to Be Registered With The State?

Many laws on Estate Planning are passed on a state level, meaning the requirements for a legal Trust will vary depending on where you live. Currently there are six states where Trusts have to be registered with the state: 

  1. Alaska

  2. Hawaii

  3. Michigan

  4. Idaho

  5. Missouri

  6. North Dakota

Within these states, the process of registration allows the state to preside over disputes involving the Trust, should any arise. Registration does not, however, allow the court to preside over the management of the Trust. Registering a Trust is typically as simple as filing a statement with the appropriate court. 

Note that a few other states, namely Florida, Maine, Nebraska, and Colorado, also have laws concerning the registration of Trusts. However, in these states there is not a mandatory registration process. A Trust should only be registered in one state at a time. 

How Should I Store My Legal Trust Document?

You should store your legal Trust documents in a safe place, such as a safety deposit box or fireproof safe. These documents can be stored alongside your Will and Power of Attorney documents. 

It’s important that someone, typically a spouse or Successor Trustee, knows where the original documents are. If they are kept in a safe or other locked area, write down or share the passcode. This is crucial to ensure they are able to promptly execute the instructions and distribute assets and property. 

It is becoming more popular to store Trust documents and other Estate Planning paperwork online, but the original documents must be printed and signed. For this reason, it is still important to think about where to keep the physical papers even if you have digital files.

Store Your Trust Documents with Trust & Will

Establishing a legal Trust is a great way to protect your finances, preserve your legacy, and provide for your loved ones. There are various types of Trusts that can help accomplish your Estate Planning goals, but they all have one thing in common: the correct steps must be taken to ensure the Trust is valid. 

The process of creating a legal Trust does not have to be complicated, in fact the most difficult part is deciding the right arrangement for your finances and loved ones. From there, our team can help walk you through each step, from formalizing your Trust documents to long-term storage. Reach out to us today to learn more about our services.

Trusts are commonly used in Estate Planning to designate funds or assets for one’s children, family members, or other loved ones. With a tax-forward setup and proper validation, Trusts can provide you with numerous benefits. Always cite state laws when creating legal Trusts and determine a safe place to keep your founding documents. These steps will help ensure your efforts are not wasted and provide you with peace of mind for years to come. 

Is there a question here we didn’t answer? Reach out to us today or chat with a live member support representative!


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