Standby Trust

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A standby trust has no funds upon inception, unless, perhaps, a token amount. Upon the occurrence of a trigger event, however, it will be funded and start operation according to its terms. For example, an operator of a hazardous waste facility may need to establish a surety bond and a standby trust. The trigger event is the closure of the facility and the inability to pay for cleanup. In that case, the standby trust is activated with funds from the surety bond, and a third party can perform the closure and cleanup.

In the context of estate planning a standby trust is established in anticipation of a period of disability or poor health of the settlor. The settlor establishes a revocable living trust. The trust normally contains most of the same provisions as a living trust, i.e., it provides for the income and principal for the support, maintenance, and health care of the settlor and spouse. The settlor names a corporate or individual trustee. On the death of the settlor, the trust continues for the benefit of the surviving spouse and terminates on the survivor’s death.

Requirements specific to a standby trust:
– The trust provisions require that funding of the trust is deferred until the occurrence of the trigger event such as a disability which would prevent the settlor from managing their own financial affairs.
– The settlor gives a person of his or her confidence, which could be the trustee, a power of attorney to fund the trust in case of his or her disability.
– If one or more physicians determine that the settlor lacks capacity to manage their personal affairs, the trust will be funded and become active.

See also: Who should be trustee?

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