Using Trusts to Protect Family Intentions
Common Family Issues
We are familiar with situations where a father wants to leave his house to a particular child because he has already given other equally valuable assets to the other child. Or, we know of cases where people agree to take care of an aging person and then force or trick the invalid to sign over title to his home to the caretaker to the detriment of the family. We may know of families where one child is disabled and needs special care after the death of her parents and the parents worry about who will take care of the child after they are gone. In the case of Cuba, there are many living abroad who have left elderly parents behind on the Island with needs their relatives abroad cannot meet, because of legal impediments, distance or unfamiliarity with local procedures.
In determining who takes title to the assets upon death of the parent in these situations, the court may not be able to determine the intentions of the deceased. And while the property is still being used by the elderly parent, the court may not have a way of knowing what permissions an elderly person has given to others that could affect the property.
In the first case, it may decide to split the property equally among the children, since it does not know of the decedent’s wishes to favor a child that was not previously favored. In the second, the court will likely rely on the papers presented by the caretaker as being legitimate and cannot be sure if the caretaker engaged in a fraudulent transaction. In the third case, the court will split the assets as provided by law, without taking into account the special health needs of the disabled child or setting aside funds for someone to continue to care for the child. That child is then dependent on the goodwill of a family member for her care.
In our last example above, without the creation of a trust, in a court challenge the court could not be sure to whom any assets sent by the relatives abroad belong. Moreover, the trustee may not have the legal right to carry out tasks and pay for services on behalf of the beneficiary.
These scenarios occur throughout the world, including both in the United States and in Cuba It is in these situations, among others, where a trust law can and should be used to implement the wishes of a person for an equitable use of his property during the remainder of his life and after his death.
What is a Trust?
A trust has unique characteristics within law. It is a relation where a certain amount of cash or other valuable items owned by one person are donated by the owner (the donor) to the trustee (a natural person or a legal entity) for the benefit of a third party or parties (the beneficiaries). The trust is created by a written agreement between the donor and the trustee to benefit the beneficiary or beneficiaries, who are not themselves parties to the agreement.
There is a distinction between legal and equitable title to the trust’s assets. Upon turning over the assets to the trust, the donor loses the right to ownership of the property and the trustee receives the legal title to the assets, as well as the legal obligation to administer the trust property for the benefit of the beneficiary or beneficiaries, who become the holders of the equitable title to the assets.
The trustee can be an individual or any other person having separate legal existence, such as a company, a governmental entity or a civic organization. While the trustee may be compensated for her services and may be reimbursed for expenses she has incurred on behalf of the trust, the trustee may not use the property of the trust for her own purposes. The trustee is charged by the law to look out for the best interests of the beneficiaries, manage the trust property prudently and protect it legally by appealing to the courts, if necessary.
Use of the Trust Throughout History
The trust dates back to Roman times, and has been employed throughout the ages for protecting certain property for the benefit of others, particularly a group of persons. During the middle ages, the trust was used to take title to the property of a group of people or institutions such as monastic orders, churches, fraternal organizations, trade associations and institutions dedicated to the care of the poor.
The property was titled in the name of the institution administering the trust assets, such as the monastic order. For example, when a nun entered a convent, she and her family contributed property to the convent, which became the trustee of the property, and that property became part of the collective property of the group of nuns in the convent. The trust served to hold assets for ever-changing groups of beneficiaries, as the members of the order changed over time, new women joined the convent and others died.
Current Use of the Trust
The trust began to be used in recent times to allow individuals, during their life, to direct the use of their assets during the remainder of their lives if they became incapacitated, and after their deaths. The donor enters into a contract with the trustee declaring his intentions and the trust “springs to life” either at a date or the time of an event specified in the trust agreement, or at the moment of the donor’s death. A trust is also used to provide funds for a trustee to satisfy the needs and provide administrative support for a member of the family living away from the donor who needs care and supervision because of old age or disability. Placing assets in trust allows the donor to determine the best use of his property under a variety of possible future scenarios and to plan for contingencies.
There are three types of trust that are commonly used today.
- The revocable trust has largely become a substitute for a will. By passing title to the trust during life, the donor avoids the court proceeding at his death for determining how the assets will be distributed, and possible family conflicts before the court. The trust remains revocable during life and therefore the beneficiaries have no right in the trust assets during the donor’s life, as the donor can change his mind. The aspect of revocability allows the donor to change the assets in the trust or change the beneficiaries, as conditions in the family change.
- In addition to serving as a substitute for a will, the irrevocable trust is used by donors planning for their own incapacity. As they approach a time when they are no longer able to care for themselves, donors may transfer the assets to the trust and provide for the trust to pay out funds for their care during the remainder of their lives. This avoids having a court appoint a supervisor for a person who becomes mentally incapacitated.
- A third use of the trust is for charitable purposes. In this case, the trust does not need to specify a beneficiary, provided that it says the trust assets are to be used for only a permitted purpose, which have been generally recognized over the ages as: a) the relief of poverty; b) the advancement of education or religion; c) the advancement of health; d) the advancement of any governmental purpose; or e) the advancement of any purpose of benefit to the community.
Examples of uses of a trust agreement can be gleaned from the following instructions:
- “I leave my house to my wife for the rest of her life and after her death in equal shares to our children who are then alive.”
- “I am hereby transferring the funds in my savings account and the home in which I live to the trust to be used as follows: I will continue to occupy my home until my death and the funds shall be used to maintain the home and pay the salary of my caretaker and all other expenses of my care until my death. After my death, any funds remaining and the home will be transferred to my only daughter.”
- “I leave all of my goods to my disabled child to cover his housing, personal needs and medical attention until the time of his death; and after his death, whatever is left shall be divided in equal parts among the rest of my children then living.”
- “The trustee shall use these funds I am placing in trust to pay only for the reasonable educational expenses of my children and grandchildren, as determined by the trustee.”
- “As my children all have suitable homes, after my death the title to my home shall pass to charity X provided that it is used only as a school or for educational purposes.”
- “The trustee shall use the trust assets to pay for the personal and medical needs of the beneficiary, to pay for maintenance expenses for his home and to pay on his behalf any fees or taxes that he may incur”.
Examples of Using the Trust to Solve Family Issues
In our first example at the beginning of this article, the donor could specify that the trust is created at his death and that the house is to become the property of the child he had not previously favored and chose to favor at death. For this purpose, he could use a revocable trust and change his mind even before his death. At the time of his death, title to the house will pass to the child and in the case of a court challenge by the other child, the court will give effect to the donor’s express wishes as set forth in the trust agreement, regardless of what other methods the law may provide for distribution of assets.
In the second example, the donor of advancing age could create an irrevocable trust and select an effective date for the transfer of the assets, specifying himself as beneficiary to use the house until his death and that the property will then pass to his children. Once the trust agreement is created, the legal title passes to the trustee selected by the donor and a caretaker cannot force or trick the elderly man to transfer title to the property, as title will have already been transferred to the trust for the benefit of the donor until his death and after his death to his children. In case the caretaker were to present documents purporting to transfer title to the property, the court would look to the trust agreement, which would be presented by the trustee and give it effect instead.
Our third example contemplates continuing care for a disabled child after the death of the parents. This requires the selection by the donors of: a) a trusted relative who is likely to live at least as long as the disabled child, and b) a younger trusted relative to serve as a replacement trustee in case of the death of the first trustee, or c) an institution to administer the trust.
The trust assets would be used by the trustee for the payment for adequate housing and personal and medical expenses incurred in the care of the child until his death, and the reasonable expenses incurred by the trustee in carrying out the duties imposed by the trust. In this third example, the donor could use a revocable trust, which, of course, becomes irrevocable at his death.
In our last example, the donor could create and fund an irrevocable trust in Cuba and identify a resident to serve as trustee. The trust would empower the trustee to use those funds to pay for the maintenance of the dwelling, supervise and pay for the beneficiary’s caretaker and cover all other needs and expenses the beneficiary may incur. In this last example, the donor can essentially have a local agent, familiar with local practice, supervise and pay for the care of the elderly relative – something that a donor living abroad could not do – without fear that the local agent would appropriate funds or the caretaker could trick the elderly relative into signing over title to the property without legal recourse.
A robust trust law can be used to overcome the legal rules in most jurisdictions that, in the absence of a trust or will, assets are divided equally among the heirs regardless of their financial circumstances or special needs. Trust law allows a donor to specify how family members will share the donated assets and how they may do so over a period of time and based on their needs, reducing unfair dispositions, family feuds and even providing for charities in certain cases.
Anglo American legal system, see: John D. Morley and Robert H. Sitkoff Trust Law, “Private Ordering and the Branching of American Trust Law”
Latin American legal systems, see: Leonardo Perez Gallardo, “Fideicomiso constituido por testamento. Una mirada desde el Derecho latinoamericano”