The Basics Vol. 1.02: What Is A Trust?
What is a Trust? Most people have others in their life that they “trust”, and most people have heard reference to an inherited “trust fund,” but what does it mean when we refer legally to a Trust?
Black’s Law Dictionary, tells us a Trust is “a property interest held by one person (the trustee) at the request of another person(the settlor) for the benefit of a third person (the beneficiary).” So, a Trust involves people serving in three different roles, which is the basis for a legal relationship. Importantly, a trust is not like a corporation, which is an entity separate from the people who own and run it. Rather, a trust is a specific kind of relationship between individuals, not a separate entity.
A Trust is a kind of relationship, not a entity or thing; still, a practical, easy way to think about a Trust is to think of it as a special kind of box. It is a box which certain items – or property – is put into. Once those items are placed in the box, only one designated person can take things out of the box. Also, that person must obey certain rules as to what, when, and why he can take things out of the trust.
Finally, and most importantly, the element which really makes a Trust work is the idea of a fiduciary duty. A fiduciary duty is in fact the highest duty that the law imposes on an individual. If Sam owes a fiduciary duty to Bob, this means that Sam must but Bob’s interests above his own. This special duty Sam owes to Bob is at the heart of every Trust. In addition, there are generally extremely severe consequences for breaching this fiduciary duty. It means that someone can give money to Sam and feel safe that it will in fact be used for Bob’s benefit.
There are many kinds of trusts all based on this special relationship. Most of us have heard of “Trust Funds,” but other types of trusts include: Revocable Trusts, used for estate planning; “Miller” Trusts, used for Medicaid planning; Supplemental Needs Trusts, used to help plan for children or adults with special needs; Charitable Trusts, for charitable purposes; Educational Trusts; and, many others. Trusts can be customized to an almost infinite degree. Trusts may exist for a few years or keep going for several generations, or even, forever. Trustee’s may be changed, and in certain circumstances the same person may even serve as Trustee and Beneficiary of a Trust – though, that gets complicated!
Also, Trusts are not just for the wealthy. Why might you think about setting up a Trust? For any situation where you want one person to receive the benefit of the property while another manages the property. In addition, there can be many other benefits of setting up trusts, including tax planning, asset protection, to protect minor or young adult children, and many others. Creating and maintaining trusts can have significant tax consequences which are potentially positive or negative. As a final note, trust planning a complex and fact specific undertaking and should only be undertaken in consultation with a qualified attorney and should not be undertaken on a do-it-yourself basis.
Redding Law, PLLC intends this educational article to be an overview of a legal document, idea, or theory. The reader should note that this overview is specific to Texas and Texas laws and is not intended to be legal advice for any person or situation. To receive additional copies of this newsletter or permission to reprint any portion please contact Redding Law, PLLC. f
