Picture in your mind a box. Let’s call that fictional box a trust. Into that box you can put cash, stocks, bonds, mutual funds, the deed to your home, or even life insurance. You can put almost any asset into the box. When you do put property into the box, you are funding the trust (although some authorities restrict the definition of the term funding to the transfer of income-producing assets into it). Funding (in the sense of adding income-producing assets to a life insurance trust) is usually for the purpose of providing a source for premium payments where the trust will actually own and hold one or more policies.
State law determines the existence or nonexistence of a trust. In fact, it does not technically come into existence until it is at least nominally funded (often with little more than a small U.S. Savings Bond). Some states allow them to be considered funded merely by naming it the beneficiary of life insurance proceeds. Almost any type of asset can be placed into it. Assets typically found in trusts include cash, stocks, bonds, mutual funds, the deed to real estate, and life insurance. Additional assets can be placed into it even after it is initially funded. For example, a small government bond may form the initial funding of a trust but then later the same trust can be named as beneficiary of a life insurance policy, a pension plan, an IRA, or HR-10.
A trust is therefore a legal relationship that enables one party (a trustee) to hold money or other property (the trust principal or res or corpus) transferred to the trust by a second party (the grantor, settlor, or trustor) for the benefit of one or more third parties (the beneficiaries) according to the terms and conditions of a legal document (the trust agreement). In other words, it is a means by which a property owner may separate the burdens of property ownership from the benefits of property ownership to whatever degree, upon whatever terms, for whatever period (within reasonable limits imposed by law), and for the benefit of whomever he pleases.
Again, the key to understanding a trust is that for investment, management, and administration purposes the trustee holds full legal title to the property in it. But that trustee (or trustees, since there can be more than one) must use or distribute the property and the income it produces solely for and to the beneficiaries (or class of beneficiaries) selected by the grantor and named in it.
Should the trust fail (perhaps because it is declared invalid for technical reasons), the beneficiary holds the proceeds under what is called a “resulting trust.” This is fictitious and created by law to prevent unjust enrichment. Usually, the proceeds held in such a resulting trust are eventually paid to or for the benefit of the would-be grantor’s estate. However, if it is poorly drafted and there is not sufficient evidence to show that the presumptive grantor intended to create a trust, the beneficiary takes total and absolute title to the proceeds.
Living Trust Defined
If set up during the lifetime of the client, it is called an intervivos (living) trust. It can hold assets (including life insurance contracts) placed into the trust by its creator during his lifetime. It could also provide for the acceptance of additional assets at its creator’s death. His will could “pour over” assets from the estate into what was previously established. This is the Life Insurance Trust–Pour Over Will (LITPOW) combination that has been used as an effective estate planning tool for generations.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM