If you want a legal definition, Black’s Law Dictionary says that a Trust is “an equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership, recognized and enforced by courts of chancery.”
Well that’s just… fabulous. But what about in plain English?
Basically, a Trust is a relationship between three classes of parties. You have the person who creates the trust (often called a Grantor, Settlor, or Trustor), the person who manages assets placed in trust (the Trustee), and a beneficiary, who is the person that will benefit from the assets of the Trust, as managed by the Trustee. Keep in mind that, while I have used the singular above, there can actually be more than one Grantor, more than one Trustee, and more than one Beneficiary.
You have probably heard of having the title to property. Perhaps you have a deed on your home, or a car title. But, did you know that there are actually two types of title – legal title and equitable title? When you own property such as a car, you hold both the legal title and equitable title. In other words, you are both the legal owner of the property, and are the person who benefits from the property.
When a Trust is established, legal and equitable title are divided. The Trustee agrees to accept legal title from the Grantor, and agrees to manage and protect the assets for the benefit of others – The beneficiaries, who hold equitable title. The Trustee agrees to manage and distribute the assets according to the directions in the written Trust Instrument, or according to the terms of a testamentary trust (a trust created by giving property to a beneficiary, in trust, in your will).
So, while many people tend to think of a Trust as a document, a Trust is actually the RELATIONSHIP that is created by the transfer of property from yourself to another (or yourself, as Trustee), for the benefit of someone else.
And, if you have made it to this point in this article, you are probably thinking “okay, now I guess I understand WHAT a Trust is, but why would I want to create one”?
And… that will be the topic of a future article.