What is a Trust? Have you ever asked yourself What is a Trust? A trust is a legal arrangement involving at least three parties:
- a Settlor (also called a Grantor or Trustor),
- a Trustee,
- and a Beneficiary.
Among these 3 parties:
- The Settlor creates the trust, and in an estate planning context is usually the party that transfers money and property into the trust.
- The Trustee manages the trust.
- And the Beneficiary or Beneficiaries receive the benefits from the trust.
In many cases, the Settlor will also define successor Trustee’s and successor Beneficiaries who step in when previous Trustee's or Beneficiaries are no longer acting in those roles.
Trusts are most often created when a Settlor executes a document called a Trust Agreement or Trust Instrument typically drafted by the Settlor’s attorney but not always. Trusts can also be created by a court order, or created by a decedent’s will, and in rare cases can even be created orally. But however formed, most trusts become private legal contracts governed by state law. The Parties held to the contract are the Settlor and person serving as Trustee.
The Trust Agreement specifies the responsibilities of the Trustee, how assets in the trust are to be managed, and under what circumstances the Trustee may allow a beneficiary access to trust assets. Importantly the Trustee is a “Fiduciary”, meaning the Trustee must always act in the best interests of the trust Beneficiary.
Trusts are important tools often employed by estate planning attorneys to achieve all sorts of client goals. The common Revocable Living Trust in estate planning is unique because the client initially acts as Settlor, the Initial Trustee, and Initial Beneficiary thereby maintaining complete control and use over their own property transferred into the trust.
Other forms may be completely Irrevocable Trusts and mismanagement can cause catastrophic control and tax problems. And of course, there’s a spectrum of trusts that fall in the middle of these two extremes.
Therefore, when making a trust it’s important to work with a licensed attorney who is an expert in designing a trust tailored to your specific situation, needs, and goals.