WHAT IS A TRUST
“I want a trust,” says the man who has come to see me today.
When I inquire further, he’s uncertain as to why he wants a trust. He’s heard that he should have a trust, so he thought he’d run the issue by me.
Most people who “want a trust” are thinking of a revocable living trust. Some have read books or seen television personalities tell them that they need to have a living trust in order to avoid government interference with their estate, unwanted public attention, and death taxes.
The concept of a trust tends to be very intimidating to people. People simply don’t understand how a trust works or why an individual would even need a trust. People that I encounter typically speak about a trust as if there were one trust document that lawyer simply pulled off of a shelf and handed to the client.
But trusts are varied documents, as varied as the different needs of people. In essence, a trust is a contract, or agreement, among the parties to the trust. Every trust agreement has three parties – the grantor, the trustee, and the beneficiary.
The “grantor” – sometimes called the “settlor” – of a trust is the person whose money, or other assets, form the “corpus,” or body, of the trust. In other words, people establish a trust to provide for the management of an asset for the benefit of either themselves or someone/something else. The grantor is the person who contributes that asset to the trust.
For example, Mr. Smith establishes a trust for the benefit of his grandchildren with his brokerage account. Mr. Smith is contributing his brokerage account to the trust, so he is the grantor. The trust might have a charitable purpose. Mr. Smith might contribute his brokerage account to the trust for the benefit of his alma mater.
The “trustee” of the trust is the individual or entity whose job it is to manage the assets of the trust. Sometimes, the grantor and the trustee are the same person.
Mr. Smith contributes his brokerage account to a trust for the benefit of his grandchildren, to pay for the college education of the grandchildren. Mr. Smith names himself as the trustee of the trust. Mr. Smith will have the responsibility for managing the assets in the brokerage account – investing the assets – and for making distributions of the assets to the beneficiaries according to the terms of the trust, that is, to pay for the education of the grandchildren.
Mr. Smith could have named a bank or the brokerage house, itself, as the trustee. Oftentimes, banks and brokerage house are more than happy to be trustees for a fee. In this event, the bank or brokerage house would have the responsibility to manage the assets of the trust and to make distributions to the grandchildren.
The “beneficiary” of the trust is the person or persons for whom the trust was established to benefit. In the above two examples, the grandfather established the trust for the benefit of his grandchildren. The grandchildren are the beneficiaries.
With that said, there are different types of trusts. There are revocable trusts and irrevocable trusts. There are living trusts and testamentary trusts.
A “revocable trust” is a trust the terms of which can be modified after its creation. For example, Mr. Smith funds a revocable trust with his brokerage account for the benefit of his grandchildren. The trust indicates that the trust assets are to be used to pay for the college education of the grandchildren. If he decides to, Mr. Smith could change the terms of his trust to benefit other people or to benefit the grandchildren in other ways.
An “irrevocable trust” is a trust the terms of which cannot be modified. For example, Mr. Smith establishes a trust for the benefit of his grandchildren, to pay for their college education. Mr. Smith cannot change the terms of the trust. The trust assets can only be used to pay for the grandchildren’s college education.
A “living trust” is a trust that is established during the lifetime of the grantor. All of the above examples are examples of living trusts, a trust that Mr. Smith established while he was still alive.
A “testamentary trust” is a trust that only comes into being after the grantor has dies. Typically, the trust is contained in the Last Will of the grantor.
Trusts can be used for all different purposes. You might establish a trust for minor children, for a child who is a spendthrift, or for a disabled child. The different situations are as varied as our different lives and needs.