Wednesday, May 4, 2011

What Is a Trust?

Stupid question, right? Everyone knows what a trust is…or do they? Some people wrongly assume that a trust is an entity, like a corporation or limited liability company. While many states do recognize an organized business trust entity, the vast majority of trusts are not technically recognized as entities by the state. Simply stated, a trust is an agreement whereby property is held and administered by one person for the benefit of another.

There must be at least three parties to every trust agreement: the settlor, the trustee, and the beneficiary. The settlor is the person who forms the trust by contributing property to the trust agreement. Such property is known as the trust corpus or trust res. Sometimes a settlor is also referred to as a trustor, grantor, donor or creator. The trustee is the person who holds the trust corpus for the benefit of another. The beneficiary is the one for whom the trust corpus is held, and the one to whom distributions are made.

On a more academic level, a trust is created (or settled) when the title to property is split into two parts: legal title and beneficial title. Legal title refers to the ownership interest of a trustee. One who has legal title to property has the right to hold, possess, and deal with such property. Beneficial title, on the other hand, refers to the ownership interest of a beneficiary. One who has beneficial title has the right to enjoy the benefits of the property. Before the trust is ever formed, and title is thus bifurcated, the settlor will generally possess both legal and equitable title, or absolute title.

In common law jurisdictions, trust agreements are governed by the terms of the trust document, or trust indenture as they are sometimes called. The trustee is obligated to administer the trust in accordance with those terms as well as in accordance with governing law.

Common law trust doctrine first developed in the 12th and 13th centuries when landowners leaving England to fight in the Crusades would convey ownership of their land to a friend or family member, with the understanding that title would be conveyed back upon the Crusader’s return. Today, trusts are commonly used as testamentary devices (e.g., living trusts) or as tools to achieve one’s tax planning and asset protection objectives. Whatever a person’s legal needs may be with respect to property, it is almost certain that solutions can be found through the use of trust agreements.

 - Attorney David M. Grant

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