A trust is an arrangement whereby money or property is managed by a person, group of people, or organization for another’s benefit. All such money or property is owned by the “Trust” and managed by a named “Trustee(s).” The trustee is not the legal owner of the trust property, but the trustee is obligated to hold the property for the benefit of the named individual(s) or organization(s) known as “beneficiaries.” Trustees have several fiduciary duties to the beneficiaries including, but not limited to, the duty of loyalty and impartiality, the duty to identify, collect and protect trust assets, the duty not to commingle trust funds, the duty to inform and account to the beneficiaries.
There are several reasons why people or organizations create trusts, some of the most common of those reasons include:
- Privacy. Trusts may be created purely for privacy reasons. The terms of a Will are public information and the terms of a trust are not. In some families this alone makes use of trusts ideal.
- Spendthrift Protection. Trusts may be used to protect one’s self against one’s own inability to handle money. It is not unusual for an individual to create a “living trust” with a corporate trustee who may disburse funds only for reasons specifically mentioned in the trust document.
- Wills and Estate Planning. Trust provisions are often included as part of a Will. Most individuals who have minor children will often leaves assets for benefit of the children in a trust until the children attain a designated age. The named trustee may have specified powers to use the trust to assist the beneficiary children with education or general welfare-related expenses during the trust’s duration.
- Charities. In some states, all charities must take the form of trusts and their governance and asset management are tightly regulated for the public benefit.
- Asset Protection and Tax Planning. There are ways that trusts can be drafted to protect certain kinds of assets from certain creditors in a legal and moral way. Additionally, the tax consequences of using a trust are usually different from the tax consequences of using another route to protect assets. In some cases, it is advantageous to use a trust to minimize tax consequences. However, it is important to recognize and keep in mind that minimizing tax consequences is a legal and ethical practice and is different from tax evasion which is the illegal concealment of income from the tax authorities.
- Co-ownership. Ownership of property, particularly ownership of real property, by more than one person is often facilitated and streamlined by a trust.