A trust is a legal entity or device used to take care of property in special ways. Trusts are created by a legal agreement, basically a contract, between two parties. These contracting parties are known as the grantor and the trustee. The grantor and trustee create the agreement for the benefit of a third party known as the beneficiary. (See Figure 5 and refer back to the definitions at the beginning of this Section.) This agreement is private and is not an arrangement created by state statutes (as are corporations, for example). This is an important feature because private agreements have tremendous flexibility in their provisions. Even though a trust is a private agreement, it is recognized by the laws and courts as an independent legal entity, an independent owner of property. In fact, trusts are independent entities much like corporations. Thru their trustee trusts may own property, may file tax returns and pay taxes, may own bank and investment accounts, earn income, distribute profits to the beneficiaries, conduct business activities, etc.
As stated above, trusts have three parties to them: grantor, trustee, and beneficiary. Grantors are the individuals who own property which they wish to have managed, controlled, protected and transferred to heirs by a trust. Once their property is in the trust the grantors no longer hold the legal title to the property, though they usually retain the exclusive rights to use the property or its income and usually retain full control of the property. The trustee is the legal administrator of the trust and the legal title holder of the property. The grantors’ relationship to the trust is determined by the language which they put into the trust agreement. The beneficiaries are the individuals or charities that receive benefits or income from the trust property, and eventually receive the property itself. When the grantors retain for their lifetime the rights to the income and use of the trust property, then the beneficiaries will receive their benefits after the grantors die. In still other cases the grantors and beneficiaries both receive benefits from the trust simultaneously.
A family trust in which the grantors hold all three positions — grantor, trustee, and beneficiary — is known as a living trust. This trust category is almost always revocable. The living trust really isn’t a trust though because it is not an agreement between two separate parties, grantor and trustee. There is in fact just one party in the living trust, the grantor or grantors. Since one party cannot write a legally binding agreement with itself, the living trust is not a contract, not a complete trust during the lives of the grantors (even if there are two grantors, legally they are still one party). Therefore the living trust arrangement is not recognized by the laws and the courts as an independent entity. It is simply thought of as an extension of the grantors and as a special way the grantors have titled their property. However, if the grantors appoint an independent or separate trustee to administer the revocable trust and to hold legal title, there is then a real contract and a real trust regardless of who the beneficiaries are. If the grantor/trustees become mentally incapacitated, the pre-appointed successor trustee automatically assumes the trustee position, and then the living trust becomes a real trust.
If the grantors retain the rights to the benefit, use or income of the property in the trust, then the grantors are also the current or primary beneficiaries. In that case the heirs who are named to inherit the trust property after the deaths of the grantors are known as remainder or secondary beneficiaries. If the grantors do not retain economic benefit or control of the trust property, then their heirs are named as the current beneficiaries.
Revocable and Irrevocable
An arrangement where the trust may be revoked or canceled at will by the grantors is known as a revocable trust. If a trust cannot be canceled by a family member without permission of the other parties to the trust, the arrangement is called an irrevocable trust. Irrevocable trusts usually are recognized as independent legal entities whereas revocable trusts are not.
The well known living trust referred to above is almost always a revocable type. However the grantors may choose to have an irrevocable trust and then receive some special or extra benefits.