A trust is a separate and distinct entity. It has a legal status to the same extent as a corporation or a partnership. It can own assets, incur liabilities, engage in business and commercial transactions, make gifts of property, and is usually subject to taxation. In short a trust is fictitious person that has all the powers of an individual except that it has no biological functions.
As a fictitious entity, a trust differs from a corporation which is created under statutory authority, but it is like a partnership which is created by a contract or similar instrument (deed, will, or other writing). It also differs from both a corporation and a partnership in its organizational structure. Instead of having shareholders, directors, and officers like a corporation, or partners like a partnership, it has trustors (sometimes called settlors or grantors), trustees and beneficiaries.
The rights, duties and obligations of each party to a trust developed over time in the English common law system. In the United States, each state has retained the concept and added an overlay of statutory law for the orderly administration and oversight of trusts. The creator or creators of a trust are the “trustors”. If they retain the right to amend or revoke the trust, the trustors have continued power over it; conversely if no such powers are reserved then the trustor’s role is at an end and the trust is therefore irrevocable. The “trustees” are the persons or entities who are charged with the responsibilities of carrying out the terms of the trust in accordance with the trust document and state law. The trustees own the trust assets and therefore take title to all of them. The trustees are bound to perform their duties at the highest level imposed by law. These duties are termed “fiduciary duties” and for a trustees failure to perform at that level, the trustee is personally liable. Such a liability is not dischargable in bankruptcy. Thus a trustee has all the duties and obligations that go with ownership but none of the benefits, these are reserved for the “beneficiaries”. This division between ownership and benefit is the distinguishing characteristic of a trust, and the characteristic which makes trusts so useful in tax avoidance, and general estate planning.
The “beneficiaries” are the persons or entities who have been identified in the trust document as entitled to receive the benefits of the trust. The benefits are in the form of income or principal disbursements. The beneficiaries may be individuals, a class or group of unnamed individuals, charities or any other conceivable entity. The benefit may be conditioned upon a specific age, event or occurrence. It may also be terminated the same way and directed to other beneficiaries. Typically the beneficiaries are ones spouse, children, parents, grandchildren, siblings, nieces and nephews.
WHY IS A TRUST USED IN ESTATE PLANNING?
The principal reason for using trusts in estate planning is due to the fact that trusts separate property ownership and control from property benefit. Because taxation is almost always based upon ownership or control and not benefit, and because the fundamental nature of a trust places ownership and property control with the trustees and allows the benefit to go elsewhere, a trust is ideal for funding with the unified credit equivalent amount from the estate of the first spouse to die while giving the surviving spouse the entire benefit of the assets placed in the trust. It is also ideal for controlling the method and manner of gifting income and principal to intended beneficiaries or to incapacitated members of a family. The fact of the assets being owned and controlled by the trustees according to the terms of the trust is the trustors control mechanism.
