A trust is a legal relationship only available in certain common law countries such as the United States. It is not a legal entity. This trust is not to be confused with a business trust, which is a legal entity.
A trust is an arrangement created either by a will or by an inter vivos declaration by which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries.
The trust involves a grantor (the person who funds the trust with assets, also called a settlor), a trustee (the person who manages the assets) and trust beneficiaries (the persons who benefit from the trust assets and their income).
Trusts are usually not recognized as such in civil law countries such as in Europe.
Trusts are governed by the laws of a specific state, not by federal law.
A trust is a legal relationship between the grantor (settlor, the person who gives the assets), the trustee (the fiduciary who manages the assets) and the beneficiaries.
Even though the trust is not an entity (a juridical person), it is often treated as such. For example, irrevocable trusts are assigned a federal tax identification number (called an Employer Identification Number).
A trustee is a person or an institution (such as a bank or a trust company) who manages trust assets according to the wishes of the grantor laid out in a trust instrument for the benefit of the trust beneficiaries. The trustee is held to high fiduciary standards. The fees that the trustee may be paid are set by state law.
There are two basic categories of trusts: revocable trusts and irrevocable trusts.
Revocable trusts can be changed by the grantor during his lifetime.
A revocable living trust is an arrangement created by a written agreement or declaration during the life of an individual and can be changed or ended at any time during the individual’s life.
This is an agreement with three parties: the settlor (grantor or trust-maker), the trustees (or trust managers), and the trust beneficiaries. The same person can have several roles in this legal relationship. For example, a husband and wife may name themselves all three parties to create their trust, manage all the assets transferred to the trust, and have full use and enjoyment of all the trust assets as beneficiaries. Further “back-up” managers can step in under the terms of the trust to manage the assets should the couple become incapacitated or die. Special provisions in the trust also control the management and distribution of assets to heirs in the event of the settlor’s death.
A revocable living trust is generally created to manage and distribute trust property. It is usually set up to avoid probate and maintain the confidentiality of the assets. Many people use this type of trust instead of (or in addition to) a will. The expense and time needed to manage the trust must be considered. Simple cases do not warrant trusts.
Because this type of trust is revocable, it is treated as a grantor type trust for tax purposes.
Simply placing assets in a revocable trust does not save estate taxes, as the assets are still considered to be part of the decedent’s estate.
By setting up an irrevocable trust the grantor relinquishes control of the assets placed in the trust. These assets are no longer part of the grantor’ estate. Irrevocable trusts serve especially the purpose of asset protection.
Revocable trusts become irrevocable upon the death of the grantor.