While we often talk about trusts as part of our practice, the reality is there is still a fair amount of confusion over these tools.
In my next few articles, I’m going to discuss the basics of trusts and talk about some of their general uses.
First of all, trusts
have been around for a long time; they originated in the Middle Ages from two sources. First, at that time, the church could not formally own land, so people put land into trusts for the church to use.
Second, when knights went off to the Crusades, they would leave their possessions with a friend to manage. When the knight returned, the friend would sometimes claim the knight gave the property to them, so the knight would have to go to court to determine what his rights were relative to the property.
While we think of a trust as an entity like a partnership or corporation, they are really a series of relationships between several parties:
- The grantor places property into the trust and also identifies the other parties to the transaction. Any person or entity can be a grantor – that is, a physical person, partnership, corporation or a limited liability corporation (or any other entity) can be a grantor. In addition, there is no geographic restriction on who can be a grantor — meaning a foreign person or entity can create a U.S. trust.
- The trustee manages the trust property. There are two types of trustees: professional and non-professional. Most trusts are managed non-professionally, usually by the grantor. For example, a father places money into a trust for the benefit of his children and he then manages the money in the trust. A professionally managed trust is managed by a bank or a professional trust company.
- The beneficiary is the person who receives the benefit of the trust. It’s important to remember that beneficiaries do have certain rights regarding the trust.
- The protector is a person who oversees the trustee and acts to assert the beneficiary's interest. This is somewhat of a new concept and really comes into play when a trust will survive beyond someone’s life. Suppose an individual creates a trust for the benefit of his family. He hires a protector to make sure the trustee is not acting contrary to his wishes after he dies.
- The property is the subject of the trust. All trusts have to have some property. In addition, you can place literally any type of property into a trust — securities, insurance, business interests, property — you name it.
The grantor is really the person in control of the transaction. He typically has a particular goal in mind when he creates the trust, such as making sure his children have enough money to pay for college or providing for his wife after he dies.
Finally, there are no tax advantages to trusts. Once a trust has more than $7,500 in income, they are taxed at a rate of 39.6 percent.
In the next article, I’ll touch on some of the more popular uses for trusts.