It allows parents to provide for their children or for high net worth individuals to protect assets, and are an essential part of estate planning and administration. Assets left to minor children under 18 years of age are generally usually done through a trust, as they generally can't control property until the age of majority.
The laws of trusts involve numerous terms. This article provides a brief description of these terms and a description of different types of trusts.
Basic trust terms
Trusts: Allows someone to split the legal and beneficial ownership of the property. Effectively, the legal owner has to use the property to benefit the individual with the beneficial ownership. A trust can determine how a person's money is managed and distributed. It also allows property to avoid taxes and probate.
Trustee: The individual(s) who holds the legal ownership of the property in a trust.
Beneficiary: The individual(s) who holds the beneficial ownership of the property in a trust.
Settlor: The individual who creates the trust and decides how to transfer properties and assets to the trustees and beneficiaries.
Trust property: The property under the trust. This is what the trustee and beneficiary have legal and beneficial ownership of, respectively.
Power: The authority to lawfully deal with someone else's property — whether it's within a trust or not. Powers can be administrative, where a trustee can decide to sell, invest, or insure the property, or they can be dispositive, where a trustee can choose to pay or transfer property to beneficiaries.
Basic categories of trusts
The most fundamental aspect of trusts starts with whether it's an inter vivos trust or a testamentary trust
- Inter vivos trusts: Also known as a living trust, an inter vivos trust is a document that creates a trust during a person's living lifetime. It's also defined as being anything that's not a testamentary trust.
- Testamentary trusts: A trust or estate created as a result of a person's death. These trusts are usually made from a will or court order.
Inter vivos trust can also be revocable or irrevocable, while testamentary trusts may only be irrevocable:
- Revocable trusts: Can be changed or terminated by the settlor during their lifetime. It's commonly used to plan for severe disability. The settlor can reserve the right to dissolve the trust at any time. Testamentary trusts cannot be revocable trust because the settlor is no longer alive.
- Irrevocable trusts: An irrevocable trust is one where the settlor cannot change the trust once it's established. This means they can't dissolve the trust either.
Bare and express trusts are instruments created as a result of an oral or written declaration. It may also be the result of an agreement or will
- Bare trusts: an informal trust where the trustee only has legal title to the property and no other duties or responsibilities concerning the trust property. The trustee usually has to convey the legal title to the beneficiary upon demand or according to instructions. A bare trust is generally considered the most basic of trusts.
- Express trusts: A legal act for the trustee to manage trust property on behalf of beneficiaries. An express trust can contemplate various outcomes and structures. Express trusts are more formal than bare trusts.
Resulting and constructive trusts are created by operations of law. They arise upon certain conditions and scenarios:
- Resulting trusts: Arises when the legal or equitable title is in a person's name but, due to a fiduciary relationship or a lack of consideration, the person must return it to the original owner. Ultimately the person who has legal or equitable title only acts as a trustee of the property.
- Constructive trusts: A trust is imposed under conditions where a "stranger" to the trust improperly uses trust property. Scenarios usually include unjust enrichment, wrongful gains, or a profiteering fiduciary.
Charitable trusts: This can be created as an express trust that's either an inter vivos or a testamentary trust. The beneficiary can be a charitable organization or for a charitable purpose. Whether something is for a charitable purpose involves a lot of other factors, such as whether it's for the benefit of society and sufficiently public.
Trusts are an essential instrument to understand, especially for their use cases in estate administration and planning and other areas of law. There are many important terms you have to understand related to this area of law and numerous categories and types of trusts to learn about. We hope this article has provided you with a basic understanding of these terms.