How to Read a Trust Instrument and Create a Trust Plan
After you’ve been named as trustee of a trust, you will need to understand the trustee’s duties and powers as soon as possible in order to create a plan for administering the trust. The conditions of the trust are usually spelled out in a trust instrument. Read the instrument carefully and ask the grantor’s attorney for the answers to any questions you have regarding the document itself or your role as trustee.
Reading the trust instrument
Reading and understanding the trust instrument is the first step in identifying your duties and powers as trustee. In the trust instrument, the trust’s grantor includes all the powers he or she wants you to have and may specify some you can’t have.
The laws of the state the grantor chooses to govern the trust address any issues you can’t find an answer for in the trust instrument. That state’s laws also trump the trust instrument if it goes against them.
With respect to the validity of a trust, the grantor must choose a state’s laws with some connection to the trust. The grantor has the option of choosing either the domicile of the grantor, a trustee, a beneficiary, or even the location of trust assets.
For real property held in the trust, the laws of the state in which the property is located govern that property. After you read the trust instrument, you’ll also know what the grantor’s plans are for the trust over time and for the people included in it as beneficiaries.
If you know about the trust before you actually assume any power over the property, it’s a good idea to talk with the grantor about his or her intentions for the property and exactly what benefit he or she wants the beneficiary to derive from the trust. Many trust instruments are couched in nonspecific language to allow the trustee the widest possible latitude, but the grantor’s actual intent may be much more specific.
Creating a plan based on the trust’s terms
The terms of the trust govern what happens to the trust assets: who takes care of them (the trustee), who benefits from them (the beneficiaries), and how they will be invested. The terms of the trust instrument also dictate whether the property funding the trust remains in a single trust or is divided into multiple trusts governed by the same instrument.
If the grantor wants multiple trusts, the instrument also directs when to divide the assets and when and how to make payments to beneficiaries. You as trustee create a plan for caring for the trust assets and beneficiaries based on what the trust instrument tells you to do and when to do it.
For example, say the terms of a grantor’s trust instrument stipulate that you divide the trust upon his or her death equally into three trusts, one for each of his or her children. As trustee, you have broad discretion under the trust instrument to pay or accumulate income and principal from each trust.
If one child is a spendthrift, you may want to place a fair amount of the assets in long-term growth investments. If another child is preparing to purchase a home, you may decide to place a portion of the assets in his or her trust in a fairly liquid investment so it will be available for a down payment. And if the third child is planning to go to college, you might decide to place funds to cover college costs in liquid investments staggered to mature at one-year intervals.