In this week’s entry in our series on basic estate planning questions, we’re going to ask “what is a trust?” If you’ve been following along with this series, you already have some familiarity with the concept of a trust, but you may not be entirely sure what it is, what it does, and how it works. Today, we are going to shed some light on this essential idea by looking at key issues you should understand when it comes to trusts.
What is a trust? Think of it as a business.
As a person who creates a trust, known as a grantor, trustor, or settlor, you effectively create a separate legal entity that has the ability to own property and survive you after you die or become incapacitated. In other words, a trust is very much like a small business or corporation. Like a business, the trust can own property, but the trust does so with certain limitations.
As the trustor you have the right to determine the conditions under which your trust operates, and you also get to choose what kind of property you will transfer into the trust’s name. Once transferred, the trust becomes the legal owner of that property and must use it in accordance with the terms you establish.
What is a trust? It owns property for a specific purpose.
Trusts are not exactly like businesses in that they don’t go about conducting business or trying to make a profit. What they do is own property on behalf of other people. These people are known as beneficiaries. The beneficiaries have the legal right to use, profit from, or benefit from the property the trust owns. However, the beneficiaries are not the legal owners of the property, and title to the property remains in the trust’s name.
What is a trust? It is an entity run by the trustee.
If the trust is a business, someone has to run that business and make sure it does what it’s supposed to do. That person is called the trustee. When you create a trust, not only will he have to determine the terms under which it operates, and name who the beneficiaries are, but you also have to select a trustee who is responsible for managing the trust property. The trustee has a legal obligation to ensure that the trust property is managed in accordance with the terms you established, and the trustee must manage trust property for the benefit of the beneficiaries. The beneficiaries, on the other hand, are the people or organizations that are allowed to use or benefit from the trust property.
Having said all that, it’s important to understand that there are numerous types of trusts, each of which provides for distinct, and often very different, advantages and disadvantages. We will explore some of the specific types of trusts in our next discussion.