In Alabama, a trust is a tool using in estate and financial planning. The person who creates it is called the grantor (or trustor). The person who manages it is a fiduciary called the trustee. Those who benefit from its assets are the beneficiaries. In Alabama, the Uniform Trust Code Ala. Code § 19-3B-101 et seq. describes the rules related to the establishment and management of a trust. During the process of administering the trust, disputes sometimes develop. When the parties cannot resolve those issues through private negotiation, litigation before a judge may be necessary. In Alabama, the Circuit Court has jurisdiction over trust matters with the Probate Court having concurrent jurisdiction. Ala. Code § 19-3B-203
Role of a Trustee
The basic job of the trustee is to manage and distribute the assets in the trust according to the terms of the trust agreement for the benefit of the trust beneficiaries.. In managing the trust, the trustee is a fiduciary. This means that they must carry out their role as a trustee with the utmost honesty and care for the benefit of the beneficiaries and not for the benefit of themselves.
A trustee’s responsibilities include:
- Recordkeeping. Trustees must maintain records of their transactions and must be able to account for their activities.
- Following instructions of trust agreement. As described in more details below, there are many different types of trusts. The foundation of any trust is the trust agreement. The trustee is required to follow the terms of the trust agreement.
- Preparing tax returns. This may also involve tax planning.
- Communicating with beneficiaries. Communicating with the trust’s beneficiaries may mean regularly issuing statements and responding to concerns and questions. This is where diligent recordkeeping is important.
In fulfilling their duties, the trustees must deal with beneficiaries impartially, avoid conflicts of interest, and manage investments prudently.
Reasons for Trust Litigation
- Disagreements between the beneficiaries and the trustee regarding the use, misuse, conversion, fraud or theft of trust assets
- Construction of trust documents when terms are vague or open to competing interpretations.
- Accusations that the trustees breached their fiduciary duties
- Refusal of trustee to make distributions to or on behalf of beneficiaries
- Disputes between primary beneficiaries and remainder beneficiaries of a trust
- Accounting proceedings to challenge management of trust
- Challenge to the validity of the trust based on undue influence, lack of capacity, or improper execution
- Proceedings to remove trustee due to malfeasance
Types of Trusts
Trusts can be set up in several different ways. The trust document will include specifics about how assets are to be used, including when distributions should be made to beneficiaries or for the benefit of beneficiaries. Types of trusts include:
Revocable Trust. A revocable trust is also known as a “living trust.” It is created during the lifetime of the person who create it and can be changed at any time during their lifetime. During their lifetime, the grantor also funds the trust, is often the trustee as well as the trust’s beneficiary.
Testamentary Trust. A testamentary trust is created through a will and is funded by the testators assets. This means that before the trust can be funded, the decedent’s estate must be probated. Then the executor of the decedent’s estate sets up the trust and funds it according to the terms of the will.
Charitable Trusts. A charitable trust is an irrevocable trust created to benefit a nonprofit organization.
Special Needs Trust. Special needs trusts are set up to benefit those with special needs. They are often set up by parents to ensure their children with special needs will maintain eligibility for government, income-based benefits while still protecting the child’s assets. Ala. Code § 19-3B-1101
Spendthrift Trust. A spendthrift trust contains features that limits the ability of a beneficiary from accessing the assets. It also is designed so that the beneficiary’s creditors cannot access the trust’s assets. It is set up preserve the assets of beneficiaries who is financially negligent or vulnerable.