Kara Sears
Trusts are legal entities created to grow assets for beneficiaries. Trusts can be categorised as either statutory or common law trusts. Common law trusts are formed based on judicial precedents and provide more flexibility but may lack the same legal protections as statutory trusts. Trusts can also be categorised as either revocable or irrevocable. Revocable trusts may be amended, altered or revoked by the settlor at any time, provided the settlor is not mentally incapacitated. In the United States, a trust is presumed to be irrevocable unless the instrument or will creating it states it is revocable.
| Characteristics | Values |
|---|---|
| Formation | Common law trusts are formed based on judicial precedents. |
| Legal protections | Common law trusts may lack the same legal protections as statutory trusts. |
| Separate entity status | Common law trusts do not have separate entity status, meaning beneficiaries and trustees may be personally liable for trust debts. |
| Tax benefits | Common law trusts may not offer the same tax benefits as statutory trusts. |
| Flexibility | Common law trusts are more flexible than statutory trusts. |
| Cost | Common law trusts are more expensive than statutory trusts. |
| Privacy | Common law trusts offer increased privacy and security |
| Use case | Common law trusts are best suited to high-net-worth individuals and families. |
| Revocability | Common law trusts can be revocable or irrevocable. |
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What You'll Learn
- Common law trusts are formed based on judicial precedents
- Common law trusts are more complex and expensive than statutory trusts
- Common law trusts offer increased privacy and security
- Trusts are presumed revocable in Pennsylvania, California, Oklahoma and Texas
- A revocable trust allows the settlor to amend, alter or revoke it at any time
Common law trusts are formed based on judicial precedents
Trusts are legal entities created to grow assets for beneficiaries. Trusts can be categorised into two main types: statutory trusts and common law trusts. While statutory trusts are created under a specific state statute, common law trusts are formed based on judicial precedents.
Common law trusts are based on private contracts, which are linked to Article 1 Section 10 of the Constitution. They are formed when a person or entity transfers ownership of assets to another person or entity through the creation of a trust deed. The trustee of a common law trust has the legal title to the assets, while the beneficiaries of the trust enjoy the assets. Common law trusts are often used by families and individuals with a sizable amount of assets, as they offer increased privacy and security. They are also more flexible than statutory trusts and are regulated by state-specific laws.
However, common law trusts may lack the same legal protections as statutory trusts, and they do not have the same bankruptcy features. They are also more complex and expensive to set up than statutory trusts. Due to their complexity, common law trusts are best suited for high-net-worth individuals and families who have a team of experts well-versed in operating this type of business structure.
Trusts can also be categorised as revocable or irrevocable. A revocable trust may be amended, altered, or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming increasingly common in the US as a substitute for a will, as they help minimise administrative costs associated with probate. On the other hand, irrevocable trusts cannot be amended or revised until the terms or purposes of the trust have been completed. Irrevocable trusts offer better asset protection and tax advantages, as they can remove assets from the taxable estate.
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Common law trusts are more complex and expensive than statutory trusts
Common law trusts and statutory trusts are two crucial types of legal trusts with distinct characteristics. While statutory trusts are formed under specific state statutes, common law trusts are based on judicial precedents. This fundamental difference leads to several implications, including complexity, cost, flexibility, and legal protections.
Statutory trusts are widely recognised for their simplicity and cost-effectiveness. The setup process is straightforward, requiring only a short-form application and a trust agreement. They are well-defined by the law, providing clear guidance for businesses and investors. The governing laws of statutory trusts are regularly updated, and consistent judicial decisions add to the predictability of these trusts. The Uniform Statutory Trust Entity Act (USTEA) regulates the process, ensuring that profits from the real property, including rent and sale proceeds, are directed to the trust's beneficiaries.
In contrast, common law trusts are more complex and expensive. The legal rules and regulations associated with common law trusts are more intricate and challenging to navigate. The expertise required to establish and manage these trusts may also come at a higher cost. Common law trusts are often utilised by high-net-worth individuals and family offices with dedicated teams of experts who can effectively manage this complex structure.
Another factor contributing to the higher costs of common law trusts is the involvement of private contracts. These trusts are based on private agreements, ensuring privacy and security for individuals seeking to maximise their wealth retention. However, the complexity and privacy features of common law trusts come at a premium, making them more expensive than their statutory counterparts.
While statutory trusts offer legal protections, separate entity status, and tax benefits, common law trusts provide more flexibility. The state-specific regulations governing common law trusts allow for adaptability to meet specific needs. However, this flexibility may come at the expense of consistent legal protections across different states.
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Common law trusts offer increased privacy and security
A common law trust is a financial agreement where a person or entity transfers ownership of assets to another person or entity through a trust deed. It is a private contract between two parties to help grow the assets of the trust. Common law trusts are formed based on judicial precedents and offer more flexibility than statutory trusts.
The privacy that common law trusts offer is an important feature. Legal documents like wills are often public, and a trust can give individuals and families a layer of privacy for protection. Trusts can also shield assets from creditors or legal claims, including lawsuits and divorce.
While common law trusts offer these benefits, they may lack the same legal protections as statutory trusts. They are also more expensive and complex to set up, requiring a team of experts to administer them.
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Trusts are presumed revocable in Pennsylvania, California, Oklahoma and Texas
Trusts are generally presumed to be irrevocable in the United States unless stated otherwise. However, in Pennsylvania, California, Oklahoma, and Texas, trusts are presumed to be revocable unless the instrument or will creating them explicitly states that they are irrevocable. This is because these states have adopted Section 602 of the Uniform Trust Code, which allows the settlor to revoke or modify a trust unless it expressly states that it is irrevocable.
A revocable trust is a type of trust that can be amended, altered, or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. Living trusts are often revocable trusts, allowing the grantor to contribute assets for the benefit of others, managed by a trustee. The grantor can also appoint themselves, a person, bank, or trust company to manage their assets as they age. Revocable trusts are becoming increasingly common in the US as a substitute for a will, minimising administrative costs associated with probate.
In contrast, an irrevocable trust is one in which the terms cannot be amended or revised until the trust's purpose has been completed. Once an irrevocable trust is created, the grantor cannot change its terms. While rare, a court may alter the terms of an irrevocable trust in the case of unexpected changes that make the trust difficult to administer.
The choice between a common law trust and a statutory trust is an important distinction to make. A statutory trust is a legal entity created under specific state statutes, while a common law trust is formed based on judicial precedents. Common law trusts provide flexibility but may lack the same legal protections as statutory trusts.
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A revocable trust allows the settlor to amend, alter or revoke it at any time
A revocable trust is a legal entity that can be amended, altered, or revoked by its settlor or trustor at any time—provided the settlor is not mentally incapacitated. This type of trust is becoming increasingly common in the US as a substitute for a will, as it minimises administrative costs associated with probate and provides centralised administration of a person's final affairs after death.
Revocable trusts are also known as living trusts, as they are created during the lifetime of the trustor or settlor. They are designed to manage the trustor's assets while they are alive and distribute them after their death. One of the key benefits of a revocable trust is that it helps avoid probate, which can be complex, especially in California.
In contrast to a revocable trust, an irrevocable trust does not allow the trustor to amend or revoke the trust during their lifetime. The terms of an irrevocable trust cannot be amended or revised until the terms or purposes of the trust have been completed. However, in rare cases, a court may change the terms of an irrevocable trust if there are unexpected changes in circumstances that make the trust uneconomical or challenging to administer.
When deciding between a revocable or irrevocable trust, it is important to consider your specific needs and goals. Revocable trusts offer flexibility, while irrevocable trusts provide tax benefits and asset protection. Additionally, the specific rules and regulations of a common law trust depend on the state, as each state has its own unique common law of trust.
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Frequently asked questions
A common law trust is a financial agreement by which a person or entity transfers ownership of assets to another person or entity through the creation of a trust deed. It is formed based on judicial precedents and operates under state-specific regulations.
A revocable trust may be amended, altered, or revoked by its settlor at any time, provided the settlor is not mentally incapacitated. It is becoming increasingly common in the US as a substitute for a will.
A common law trust can be revocable. However, this depends on the specific state law and the instrument or will creating the trust. Trusts are presumed to be irrevocable unless the instrument or will states otherwise, except in Pennsylvania, California, Oklahoma, and Texas, where trusts are presumed to be revocable.
Common law trusts offer increased privacy and security. They are also more flexible than statutory trusts and are beneficial for families and individuals with a sizable amount of assets.
Common law trusts are more expensive and complex than statutory trusts. They may also lack the same legal protections and tax benefits as statutory trusts.
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