What is a Trust?

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Patrick and I hosted a law clinic a few weeks ago for employees of a local business.  Several of the employees took advantage of this one on one meeting format and asked some really great questions about a variety of legal areas.  One area that seemed to come up frequently was personal estate planning. Within that broad area of law a smaller subset continued to appear.  That had to do with the purpose and use of trusts in personal estate planning.  I was surprised at some of the conceptions that were held by the employees as to the purpose of trusts, the appropriate candidates for trusts and so on.  In the next several weeks I found myself explaining to a least a dozen other people what a trust truly is and what some of the general benefits of a trust might be.  This got me thinking that it might be time to update the blog with a summary of these discussions.

First off, what is a trust?  Well, a trust, in the simplest terms is a way to divide title of property between two different entities.  In order to do divide title you have to in fact have two separate entities.  The first entity is the trust itself.  A trust is a document that is drafted (can have oral trusts but that is way beyond the scope of this article) usually by an attorney.  In that document you will designate the trustee of the trust.  This person, bank or trust company will be tasked with holding legal title to all property within the trust.  The trustee will hold such legal title for the sole and exclusive benefit of the beneficiaries of the trust (this is the second entity).  Within the trust document the creator of the trust (called the grantor or trustor) has the ability to place certain parameters on most every aspect of the trust property from investment, distributions and ultimately termination and final distribution of the trust assets.  The trustee is required to hold the property and administer the property in accordance with these terms.  And as mentioned above, the trustee can only administer such property for the sole and exclusive benefit of the designated beneficiaries of the trust.

So, in essence what you have at the end of the day is a division of ownership between two entities.  The trustee holds legal title to the property of the trust.  The beneficiary of the trust holds beneficial title to the trust property.  For most every asset that we own in the normal course of life has these two titles unified.  For example, I hold legal title to my car along with beneficial title.  Those titles are unified in one person.  This division of ownership within the trust is an important feature that will be discussed in a future blog article (Asset Protection with a Trust).  But at this point I am more interested in simply discussing the structure of a trust.

A trust instrument can allow for endless numbers of different scenarios.  The grantor is allowed to serve as trustee and beneficiary (there may be some tax reasons why this would not be a desired structure, but it is permitted for a trust to be recognized as legal), the grantor can establish a trust for the sole benefit of his children, or spouse, or even a pet.  More than one trustee can serve and the directions that can be placed upon such trustee are also countless.  The trustee can hold legal title to any asset and can act on behalf of the trust with respect to those assets almost seamlessly.  The flexibility of trusts makes them very interesting and powerful documents that often have a place in the estate plans of a larger percentage of the population that generally thought.  Trusts have been thought to only be useful tools for the ultra-rich.  This could not be further from the truth.