In this week’s discussion of understanding estate planning concepts, we are going talk about trusts. Even though we have about trusts a lot in the past, it is easy for estate planning attorneys to discuss them because they are such a vital part of the estate planning process, and because we deal with them on a daily basis.
On the other hand, for the average person doesn’t have much exposure to trusts or who might be first hearing about them, understanding what a trust is and how it works can be a little difficult. To help clarify this vital concept and to give you an easy way to look at trusts, today we’re going to take a little time to talk about these important, and essential, estate planning tools.
A Trust is Like a Company
We find it’s often easy for people to understand what trusts are by using a simple analogy. Try to think of a trust as a very small company, or corporation. Like a company, or corporation, a trust is a legal entity that can exist independently of those who created it, those who work for it, or those who interact with it. When you create a trust you effectively create a small company that will have its own legal existence apart from you. Because it has a legal existence, the trust can own property in much the same way that a corporation does.
Similarly, like a company or corporation, the trust has people who manage it or work for it. Where a corporation might be run by a CEO, a trust is run by someone called a trustee. Like the CEO of a corporation, the trustee has the ability to use and manage the property of the trust owns, but is not the actual owner of that property.
The Trustee is The Trust Manager
The trustee is the person who has the legal responsibility, and authority, to control the trust property and make sure it is properly managed. Trustees can be people or organizations, but their primary responsibility is to make sure the trust operates smoothly, and in accordance with the rules established by the person who created it.
The Beneficiary Gets to Use the Trust’s Property
Since the trustee is only there to manage property the trust owns, who gets to use the property? If, for example, the trust owns $5 million in assets, who gets to benefit from those assets? The answer is the beneficiary.
When a person creates a trust, that person, call the grantor, trustor, or settlor, gets to decide who the beneficiary(s) is. The beneficiary does not manage the trust, but he or she gets to use the property the trust owns.
Parman & Easterday