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BEN WILLIAMS and MOLLY MOODY — Never trust a trust

Molly Jeffcoat Moody and Ben Williams

Molly Jeffcoat Moody and Ben Williams

Coming to his own defense, the unrepentant Mississippi Governor Ross Barnett once retorted:  “If you can’t trust a trusty, who can you trust?”  The “trusty” in Governor Barnett’s story involved a prisoner on unauthorized extended leave.  This column pertains to the considerably less exciting legal practice where one person (the Grantor) transfers legal title of property (the Corpus) to an entity (the Trust) which is controlled by a third party (the Trustee).

Trusts received a lot of attention in Mississippi last year.  In March 2014, Governor Phil Bryant signed into law the “Mississippi Uniform Trust Code,” a collection of trust laws which are largely consistent with the trust laws of 28 other states.  Then, in April 2014, the Governor signed legislation creating the “Mississippi Qualified Disposition in Trust Act,” which permits the creation of a self-settled spendthrift trust.

Most articles on this subject will extol the benefits of trusts – perhaps to shield your assets from creditors, keep the kids from squandering the inheritance too quickly, or shelter the family inheritance from the revenuers. Certainly, a properly established and maintained trust has its benefits. But this article is written by narrow-minded commercial finance attorneys.   From our skewed vantage point, you can never trust a trust.

There are, at a minimum, two recurring problems with a trust.

FIRST, grantors frequently act like their trusts don’t exist.  Never mind that the grantor has conveyed the assets to a separate legal entity with its own governance documents and tax identification number, a grantor is prone to act like she (or he) still owns the assets.  After all, the trust is really just a stratagem.   So, when it comes time for the grantor to borrow money and she attempts to pledge trust assets, she is frequently surprised that the lender’s attorney questions her ownership and ability to pledge the trust’s assets as collateral for her own loan.  Then, once confronted with the fact the property has been transferred to a separate legal entity (the trust), the grantor simply thinks the trustee should pledge the trust assets to secure the grantor’s personal loan (possibly in violation of the trustee’s duties to the beneficiaries of the trust).

SECOND, while everyone thinks he knows what the longsome trust agreement says, nobody wants to read it.   We can all quote a little Faulkner, but few folks actually bend the cover of his books.  The same is true of trust agreements.  And when you consider that trusts are usually drafted by tax attorneys, if given a choice of reading a trust agreement or a dense piece of literature, a reasonable person might opt for The Sound and the Fury.

Due to these problems, as soon as the lender becomes aware of the involvement of a trust in a transaction, he should start making inquiries.  Issues to think through include:

1. Does the Trustee have authority to borrow money?

2. Does the Trustee have authority to guarantee a loan?

3. Does the Trustee have authority to pledge assets?

4. Does the Trustee have the power to take these actions without notice or consent?

5. Are the proposed actions consistent with the purpose of the Trust?

6. Does “consideration” exist for the Trust to take these actions?

7. Has the trust agreement been recorded in the land records?

8. Has the trust agreement been amended?

9. Is the Trustee qualified to serve as trustee?

10. If there is more than one trustee, can one act without the other?

11. Can the grantor also be the trustee or the beneficiary?

12. Should consent be obtained from the beneficiaries?

The involvement of or need to involve the beneficiaries could be problematic.  Many grantors believe they know what the beneficiaries (who are often their children and/or grandchildren) will allow – and their actual consent is not necessary.  But some beneficiaries may have already started thinking about the day the trust will be paid out – as opposed to the trust paying off unrelated debts of a failed business venture.  This concept is similar to the proven legal principle that “[w]here there is a will, there is a relative.”

In summary, the introduction of a trust into a loan transaction is a complication.  Any problem can, however, be overcome with proper documentation, consent by all relevant parties, and an opinion from competent trust counsel.  Just be aware this may take a few days.  Trust, after all, is something earned.

Godspeed.

» Ben Williams and Molly Jeffcoat Moody  are attorneys in a commercial law practice at Watkins & Eager PLLC (watkinseager.com).   Ben is recognized by Chambers USA and Best Lawyers in America and was selected as Best Lawyer’s 2014 Commercial Finance Lawyer of the Year in Jackson.   Molly is recognized by Chambers USA in the area of Real Estate Law. 

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