What Is an Active Trust?
An active trust is a trust wherein the trustee has to take additional actions beyond passively dealing with property for the benefit of the beneficiary. Active trusts are also referred to as special trusts. An active trust is different than a passive trust, or bear trust. In a passive trust, the trustee’s only responsibility is to care for, and then transfer property, at a predetermined time to the beneficiary.
- An active trust requires the active participation of the trustee to manage and carry out its directives.
- Active trusts are different than ordinary trusts, which tend to be more passive, where the trustee has mainly a hands-off role unless called upon by specific events or timetables.
- Active trusts may prohibit disbursements to beneficiaries for certain reasons or only payout if beneficiaries follow through with certain pre-established benchmarks.
Understanding Active Trusts
An active trust is a type of trust, a legal relationship entered into by at least three parties—the trustor, the trustee, and the beneficiary—for the purposes of transferring property from the trustor to the beneficiary. In the U.S., laws that govern trusts vary from state to state. The National Conference of Commissioners on Uniform State Laws, a nonprofit association that promotes the adoption of uniform laws from state to state, issued the Uniform Trust Code in 2000, which dozens of states have adopted at least in part.
According to the Uniform Trust Code, trusts are typically arranged between a trustor and an identifiable beneficiary, but there are some trusts, like charitable or honorary trusts with no identifiable beneficiary. Charitable trusts distribute assets to charities, while honorary trusts distribute assets to things like pets, which are unable to enforce the distribution of the assets in a court of law. They are called honorary trusts because the trustee is honor-bound, but not legally required, to distribute assets according to the wishes of the trustor.
A common form of trust is a passive trust, whereby a trustor gives legal ownership of assets like money or real estate to a trustee, who is then responsible for simply distributing those assets to a beneficiary at a predetermined date. An example of a passive trust is one set up by wealthy individuals to assure the financial security of their descendants once they reach a predetermined age, presumably when the dependent is responsible enough to care for the assets without supervision.
Active Trusts and Sophisticated Planning
Trustors, however, will sometimes decide to set up an active trust if their wishes are more complicated than what is typically standard. One situation where an active trust might be desirable is when a trustor wants to make sure a beneficiary can spend entrusted money only for specific purposes, or only wants the money to be distributed when certain requirements are met.
For example, suppose a wealthy couple wants to distribute their assets to their children, but the parents have different political views than their children. These trustors may want to set up an active trust, which stipulates that the money can’t be donated to specific causes. Another example could be that the trustee can only distribute the money if the beneficiary meets certain goals, like graduating from college. These trusts are considered active trusts because the trustee is not only required to distribute money, but also verify that the beneficiary is behaving in a certain way.