United States trust law is the body of law governing the creation, administration, modification, and termination of trusts. In the United States, trust law is primarily state law, though federal tax law significantly influences trust design and administration. The law has been substantially codified in many states through adoption of the Uniform Trust Code (UTC), first promulgated in 2000 by the National Conference of Commissioners on Uniform State Laws (NCCUSL), and is further guided by the Restatement (Third) of Trusts published by the American Law Institute.
Sources of Law
Trust law in the United States derives from multiple sources. The common law of trusts and principles of equity, inherited from English law, remain foundational. The Restatement (Third) of Trusts provides authoritative guidance on trust principles. The Uniform Trust Code (2000, with subsequent amendments) is the first comprehensive national codification of trust law and has been enacted in some form by approximately 35 states. States that have not adopted the UTC continue to rely on their own statutory law and common law. The Uniform Probate Code also contains provisions relevant to trusts.
Definition and Nature of a Trust
A trust is defined as a fiduciary relationship with respect to property, subjecting the person holding title to the property (the trustee) to equitable duties to deal with the property for the benefit of another person (the beneficiary). The Restatement (Third) of Trusts § 2 defines a trust as "a fiduciary relationship with respect to property, arising from a manifestation of intention to create it, and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee."
Parties to a Trust
A trust involves three essential parties: the settlor (also called grantor, trustor, or creator), who creates the trust and contributes property; the trustee, who holds legal title to the trust property and administers it subject to fiduciary duties; and the beneficiary, who holds equitable or beneficial ownership and is entitled to enforce the trust. The same person may be both settlor and trustee, or trustee and beneficiary, but the sole trustee and sole beneficiary cannot be the same person, as this would cause the legal and equitable interests to merge.
Creation of a Trust
A trust is created only if: (1) the settlor has capacity to create a trust; (2) the settlor indicates an intention to create the trust; (3) the trust has a definite beneficiary (or is a charitable trust, a trust for the care of an animal, or a trust for a noncharitable purpose); (4) the trustee has duties to perform; and (5) the same person is not the sole trustee and sole beneficiary. A trust may be created by transfer of property to another as trustee, by declaration by the owner that the owner holds identifiable property as trustee, or by exercise of a power of appointment.
Fiduciary Duties of Trustees
Trustees are subject to fundamental fiduciary duties. The duty of loyalty requires the trustee to administer the trust solely in the interests of the beneficiaries, with a strict "no further inquiry" rule for self-dealing transactions. The duty of prudence requires the trustee to administer the trust as a prudent person would, considering the purposes, terms, and circumstances of the trust. The duty of impartiality requires the trustee to act impartially among multiple beneficiaries, giving due regard to their respective interests. The duty to inform and report requires the trustee to keep qualified beneficiaries reasonably informed about the administration of the trust and to provide reports at least annually.
Uniform Trust Code
The Uniform Trust Code (UTC) is organized into 11 articles covering general provisions and definitions, judicial proceedings, representation, creation and validity of trusts, creditor's claims and spendthrift provisions, revocable trusts, the office of trustee, duties and powers of trustees, the Uniform Prudent Investor Act, liability of trustees, and miscellaneous provisions. The UTC is primarily a default statute, meaning most of its provisions can be overridden by the terms of the trust. However, certain rules are mandatory and cannot be altered, including the duty of a trustee to act in good faith, the requirement that a trust have a lawful purpose, and the power of the court to modify or terminate a trust in certain circumstances.
Spendthrift Trusts
A spendthrift provision restrains both voluntary and involuntary transfer of a beneficiary's interest. Such provisions are valid under the UTC and most state laws, protecting trust assets from a beneficiary's creditors until distribution is made. Exceptions exist for claims of child support, alimony, and certain governmental claims.
Revocable Trusts
The UTC treats revocable trusts as the functional equivalent of wills. A trust is presumed revocable unless its terms expressly state otherwise (under the UTC). The capacity required to create a revocable trust is the same as that required to make a will. While a trust is revocable and the settlor has capacity, the rights of beneficiaries are subject to the settlor's control, and the trustee's duties are owed exclusively to the settlor.
Prudent Investor Rule
The Uniform Prudent Investor Act, incorporated into the UTC and adopted in most states, requires trustees to invest and manage trust assets as a prudent investor would, applying modern portfolio theory. Key principles include diversification, consideration of the trust's overall portfolio rather than individual investments in isolation, and delegation of investment functions when prudent.
Remedies for Breach of Trust
A trustee who breaches a fiduciary duty is liable for the greater of: (1) the amount required to restore the value of the trust property and distributions to what they would have been had the breach not occurred; or (2) the profit the trustee made by reason of the breach. Courts may also remove trustees, enjoin breaches, reduce or deny compensation, and impose constructive trusts or equitable liens.
State Variation
While the UTC has promoted uniformity, significant variations remain among states. Some states have not adopted the UTC. Others have adopted it with modifications, particularly regarding the trustee's duty to inform beneficiaries, the rule against perpetuities, and asset protection trust provisions. States such as Delaware, Nevada, South Dakota, and Wyoming have enacted laws specifically designed to attract trust business, including self-settled asset protection trusts and perpetual or dynasty trusts.
