What is a Trust?

What is a Trust?

Trust Definition:  What is a Trust?  A Trust is a contract that controls property.  A Trust has three parties.  First, there is the party who creates the trust.  This party is typically called a “Grantor.”  This party may also be called a  “Settlor” or “Trust Maker” or “Trustor.”   Second, there is a Trustee.  The Trustee is the “executive” who administers the Trust.  Third, there is a Beneficiary.  The Beneficiary is the person or party who receives benefits under the terms of the Trust.  A Trust must own property or assets.Creating a Trust.  A Trust is created when a Grantor gives the property to a Trustee in trust for the benefit of a Beneficiary.  This is sometimes called a “fiduciary” relationship.  Most Trusts are created by a document.  A Trust created by the document is generally referred to as an express Trust.  Such documentation may take the form of a Declaration of Trust, a Trust Deed, or a variety of contracts.  A Trust may also be formed by operation of law or as an equitable remedy based on the conduct of the parties.  Trusts arising by law may be implied or resulting.  A Trust can be revocable or irrevocable.  It can start as revocable and become irrevocable over time or upon certain conditions.  The parties to a Trust may be natural persons or corporate entities.  Trusts vary in purpose, function, and quality.

Not all trusts are created equal.

The Antiquity of Trusts.  Trusts have been used for thousands of years.  The words used to describe the arrangement may not have included an equivalent of the modern legal term “Trust,” but the essential elements were the same.  At times, the legal status of kings and rulers was equivalent to that of a Trustee who holds property for the benefit of others.  Trust type property arrangements have been noted and may be found in a number of ancient cultures including Egypt, Rome, China, India, Iran, and Africa.  The answer to “what is a trust” has as many variations as there are languages and legal systems.

So What?

Trusts Applications.  The question of what is a trust arises because people are dealing with them.  Trusts are commonly used for estate planning, asset protection, financial planning, and elder care.  Trusts are also powerful tools for structuring charitable gifts, subdividing real estate, and securing lender interests in real property.  Trusts can be imposed as an equitable remedy by the courts (constructive trust).  Trust can be “express” (made in writing) or implied (arising from the nature of the parties’ relationship).

Technical Issues.

Is a Trust an “Entity”?  Corporations are an “entity” which in effect means the law treats them like a person (they can pay taxes, hold assets, incur liabilities, exist independent of any particular natural person).  Whether or not a Trust is an entity has been debated by legal scholars for a long time.  Some have argued that the answer to “what is a trust?” is not an entity.  Under English Common Law, it is generally recognized that a Trust is not an entity.  It is merely a contractual relationship of its constituent parties.  This can be a significant distinction when dealing with a Trust in a non-U.S. jurisdiction.  However, at least as far as U.S. law is concerned, the “answer is yes, a Trust is an entity.”  As a practical matter, today most states and the U.S. tax code treat a Trust as a taxable entity with rights, powers, obligations and legal status similar to corporate entities.  Trusts pay taxes, own property, incur liabilities, are regulated by both statutes and courts, and may persist independently of any particular natural person.  When a party (such as a trustee, grantor, or beneficiary) dies, a successor is appointed either by the terms of the trust or by statute.  When a Trust obtains its own tax identification number, it is formally recognized by the IRS as an entity.  When a Trust is divested of its assets, it essentially “dies” and ceases to exist.  Those who continue to insist that a Trust is not an entity are living in a non-U.S. jurisdiction or have not applied U.S. law to the facts.

Trust Protector.  Another potential party to a Trust is a Trust Protector.  A Trust Protector is typically given certain specific powers and authority to make sure the intent of the Grantor is followed in the administration of a Trust.  Off-Shore, Trusts were the first to use Trust Protectors, but they have become more common in domestic trusts and are now recognized by statute and/or court decisions in many jurisdictions.  Whether or not a Trust has a Trust Protector is one of the markers of thoroughness and long-term effectiveness of the Trust.  What is a trust without a protector?  A problem waiting to happen with no solution.

Does a Trust Provide Asset Protection?  What is a trust if it does not protect assets?  Some Trusts provide asset protection and others do not.  Most revocable trusts do not, at least not while the Grantor is living.  This is because of an ancient rule that you cannot put your own assets into a trust for your own benefit and prevent your own lawful creditors from gaining access to the trust assets.  (See, Uniform Trust Code section 505(a)(2) (page 95) and commentary).  It the grantor retains the power to revoke a Trust, the courts can compel the grantor to exercise that power in favor or the Grantor’s creditors.  Some states have come to recognize that certain “self-settled” Trusts may give some asset protection.  Lawyers are still debating whether or not this actually works, and whether or not the cost is worth it.   Some irrevocable trusts may provide asset protection  Whether or not, when, how and to what degree, a Trust provides asset protection is an important factor in implementing the right kind of Trust to fit each particular situation.  A well crafted revocable Trust will provide certain asset protection when the Grantor dies.  However, most Grantors prefer to delay death for as long as possible, which is what I recommend.

What is a Trust?  To learn more, contact Durfee Law Group for a complimentary consultation or trust review.