What is a Trust?

What is a trust? Black’s Law Dictionary defines a trust as “An equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides legal title or ownership, recognized and enforced by courts of chancery.” While that definition is rather legalese, it does boil it down to the basics. A trust is a relationship between the grantor and the trustee in which the trustee agrees to hold the property for the benefit of the beneficiaries who were chosen by the grantor. The trustee is agreeing to manage the assets as set forth in the trust’s terms and distribute them when and how specified in the trust.

The grantor (also known as the “trustor” or “settlor”) is the person who establishes the trust and the trustee is the person who manages the assets. The beneficiaries are those people for whom the grantor set up the trust and wishes to benefit, either currently or in the future.

The trust terms dictate how the trustee should manage the assets and what powers the trustee has in managing the assets. Depending upon the state, state law may supplement or supplant some of the terms of the trust. For example, the trust may direct the trustee to hold the assets for the beneficiary’s benefit forever. However, in many states, the Rule Against Perpetuities would require the trust to terminate within a life in being plus 21 years, or some other period. The terms of the trust may be oral or written. However, it is most common and most advisable that the terms be in writing. Today’s trusts are often quite lengthy and the terms can be quite detailed. It is these detailed terms that allow the trust to achieve the grantor’s goals for the trust.

There are many different reasons for which a grantor would set up a trust and those reasons would influence the drafting of the trust. Depending upon the reasons for the trust, the grantor might choose different trustees. I’ll discuss the considerations for the selection of trustees in a future blog. And depending upon the purposes of the trust, the terms for distributions to the beneficiaries might vary. Possible purposes of the trust include probate avoidance, tax minimization, management for minors, creditor protection, etc.

For example, Mary sets up a trust for her son, Danny, for his future needs. Mary is concerned that Johnny does not have good judgment. So, Mary asks her brother, Mike, to be the trustee to manage the assets for Danny’s future needs. She gives Mike $100,000 to Mike to hold as trustee.

Implicit in the trust is that the grantor trusts the trustee to carry out the terms of the trust and do what has been asked of them. In the above example, Mary is trusting that Mike will hold the $100,000 and use the money for Danny’s future needs. She is trusting that Mike will not spend the money on that European vacation he’s been wanting to take. She’s also trusting that Mike will use his discretion to decide when Danny needs the money. In a future blog, I’ll discuss different discretionary standards which might be used and what they mean for the trustee and beneficiaries.