How Is a Trust Created?

Trusts are often used in financial and estate planning. A trust is a legal arrangement under which a trustee holds, manages, and disburses assets for the benefit of one of more beneficiaries. But how is a trust created? In Michigan, there are specific statutory provisions relating to creation of trusts.

Michigan Law on Creating a Trust

The person who creates a trust is referred to as the grantor or settlor of the trust. The trustee is the person or institution charged with holding the assets and administering the trust according to the provisions of the trust document. The trustee has the responsibility to collect, marshal, preserve, and distribute the assets of the trust to the beneficiaries, who are the individuals who receive assets under the trust. Michigan law has many provisions relating to settlors, trustees, and beneficiaries of trusts. The sections relating to creating a trust fall into two categories: 1) requirements that must be met for a trust to be valid and 2) permissible methods for creating a trust.

Requirements for Creating a Trust

Under Michigan law, a trust is validly created only if all of the following conditions are met:

  • The settlor must have the capacity to create a trust;
  • The settlor clearly expresses intention to create a trust;
  • There is a definite beneficiary or the trust is a charitable trust, for a non-charitable purpose, or for the care of an animal;
  • The trustee has specific duties to perform; and
  • The same person cannot be the sole trustee and sole beneficiary. One needs to understand the legal definition under Michigan law is construed as all beneficiaries including the settlor as the beneficiary and ultimate beneficiaries.

The first condition requires that the person who creates a trust must possess the mental capability to create it. Lack of capacity is sometimes asserted as the basis for challenging creation of a trust, in the same way that lack of capacity is used as the basis for contesting a will.

In addition, it must be clear that the settlor intended to create a trust. If the document or circumstances are ambiguous about whether a trust was intended, a trust may not have been validly created.

For purposes of the law, a beneficiary is definite if the beneficiary can be determined at the time the trust is created or in the future. The law does include a limitation on how far into the future a beneficiary determination can extend. Giving a trustee power to select a beneficiary from an indefinite class is valid only for a charitable trust.

Methods of Creating a Trust

In addition to setting out the conditions that must be met in creating a trust, Michigan law also provides specific methods by which a trust can be created. For a trust to be valid, it must be created by one of these methods:

  • By the settlor transferring property to another person as trustee during the settlor’s lifetime, by will, or by other disposition that takes effect on the settlor’s death;
  • By the owner of property declaring that he or she holds identifiable property as trustee;
  • By exercise of a power of appointment of a trustee;
  • By exercise of a discretionary trust provision in an irrevocable trust; or
  • By a promise from one person to another person, that the second person’s rights under the promise will be held in trust for a third person.

The statute does not include a requirement that a trust be in writing. Historically, oral trusts have been recognized by Michigan courts; however, establishing an oral trust can be very challenging. The law requires that if there is no trust document, the existence and terms of an oral trust must be established by clear and convincing evidence, which is a stringent legal standard the court will apply in cases where an oral trust is asserted.

Under the law, a trust document is valid whether or not the property or assets are transferred when the instrument is signed. Many trusts are funded after they are created. However, until the assets are transferred and subjected to the terms of the trust, the person nominated as trustee has no duties or obligations except as the settlor and nominated trustee may have agreed.

If You Are Considering Creating a Trust

Understanding the requirements and methods of creating a trust is important if you are considering using one as part of your estate plan. However, the best way — and only way — to ensure that all the legal requirements for creating a trust are met is to consult with an attorney. Our estate planning attorneys at BRMM have extensive experience in all types of trusts. Whatever your goals, we will assist you in accomplishing them. Since the 1970s, individuals and families have counted on us for guidance. Your initial consultation is always free of charge.

In addition to serving residents of southeastern Michigan, BRMM now has the ability to serve our clients with property or interests in both Michigan and Florida. Call us at (248) 494-4577 or complete our online form to set up your free initial consultation.

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