What Is A Trust?

by Jackie Bedard on April 17, 2009

in Estate Planning,Trusts

Trusts are a common tool used in estate planning.  I’m currently working on a series of posts relating to the various uses of trusts in estate planning.  Before jumping in though, I thought it best to start at the beginning.

So What Is A Trust?

A trust is a legal arrangement under which a person or company (the trustee) holds and manages property on behalf of another person (the beneficiary).  The person that creates the trust is referred to as the grantor or settlor.

How Is A Trust Created?

The trust is created by a trust document (i.e., a contract) between the grantor and the trustee.  Within the trust document, the grantor sets out the “rules” of how the trust will operate and what powers and responsibilities the trustee will have.  Trusts are subject to state law and therefore the rules and laws may vary from state to state.

What Kind Of Property Can Be Held In Trust?

Virtually any property can be held in trust, such as real estate, money, bank accounts, stocks and bonds, business interests, life insurance, automobiles, personal property and more.

Example

Mary is a widow with a minor son, Michael.  Mary has taken out a substantial life insurance policy to insure that Michael will be provided for if anything should happen to her.  Because Michael is only five years old, Mary wants to appoint someone to manage the life insurance proceeds in the event of her death.  Thus, Mary executes a trust document appointing her brother, Charlie, as trustee to manage the life insurance proceeds on behalf of young Michael.  Her trust document specifies under what circumstances Charlie is authorized to make distributions to Michael and when the trust will terminate.

Is A Trust Safe?

Under the law, trustees have a duty to the beneficiary.  This duty is referred to as a fiduciary duty.  The fiduciary duty requires the trustee to act in the best interests of the beneficiary.  Thus, the trustee cannot make withhdrawals from the trust for his or her own personal use (unless compensation is authorized under the terms of the trust).  In many instances, a trust is the preferred legal structure because it is deemed safer or better than the alternative.  I’ll delve into these scenarious in the upcoming trust series.

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