What it means
Three roles define every trust. The settlor creates it and contributes the assets, the trustee becomes the legal owner and must manage the assets according to the trust deed (the document that sets out the rules), and the beneficiaries receive the benefit.
The same person can sometimes hold more than one role, for example a settlor who is also a trustee of their own trust. A trust can be set up during life, which is called a living or inter vivos trust, or on death through a will, which is called a testamentary trust.
Living trusts can be revocable, meaning the settlor can change or cancel them, or irrevocable, meaning they generally cannot. Irrevocable trusts usually give stronger protection from creditors and estate tax, but at the cost of control.
The reasons for using one are practical. A trust can provide for a child or a vulnerable relative who cannot manage money, stage the release of an inheritance at certain ages, or keep family property together.
It can also keep the details of an estate private, because assets held in a trust may not need to go through the public probate process. Trustees carry a fiduciary duty (a legal duty to act in the best interests of others), and they must keep accounts, invest prudently and treat beneficiaries fairly.
Trust income is often taxed under special rules, sometimes at higher rates than personal income, so tax advice is important. Costs such as legal setup, trustee fees and annual tax returns should be weighed against the benefits.
For a business owner, a personal trust may hold shares in the family company or the family home. It can ease succession, but it also affects who has the right to vote the shares and receive dividends.
Lenders and investors will want to see the trust deed before dealing with a company whose shares are held in this way. Choosing the right type of trust is a legal decision, not just a financial one.
Different structures carry different rights for beneficiaries, different tax treatment and different levels of flexibility, and the rules vary by country. A lawyer who specialises in trusts can explain the options and draft the deed so that it reflects the settlor's wishes clearly.
In practice
Real-world examples.
Example
A grandmother places $300,000 of investments in a trust for her two grandchildren, instructing the trustee to pay for their education costs and to release the balance when each turns 25. This protects the money from being spent early and ensures it is used as she intended.
Example
A restaurant owner puts the family home into an irrevocable trust for his children. If the business later fails, creditors generally cannot reach the home, although the timing of the transfer will be scrutinised if it looks like an attempt to avoid existing debts.
Example
A couple with a child who has special needs creates a trust so that the child can receive support without losing eligibility for public benefits. A professional trustee manages the money and pays for housing, therapy and travel as needed.
Case study
Seen in the real world.
Whitmore Family Trust is an illustrative, fictional trust created by a retired engineer, Daniel, to hold $800,000 for his three grandchildren. He appointed a trusted accountant as trustee and wrote into the deed that money could be used for education and healthcare, with the remainder paid out at age 30.
During the first year, the trustee kept a separate bank account, recorded every payment and filed the trust's tax return. When one grandchild asked for money to buy a car, the trustee declined, because the deed did not allow it, and explained the decision in writing.
The illustrative result is that the family avoided arguments, and the money lasted. The lesson is that the value of a personal trust lies in clear rules and a disciplined trustee.
Watch out
Common mistakes.
- Setting up a trust but never transferring the assets into it, which leaves it empty and ineffective.
- Choosing a trustee on affection rather than ability, when the role demands record-keeping, impartiality and investment judgement.
- Assuming a trust removes all tax, when many trusts are taxed under their own rules and some arrangements are ignored for tax purposes.
Questions
People also ask.
Is a personal trust only for wealthy people?
No, trusts are used by many families for modest amounts, although legal and administration costs make them less economical for very small estates.
Can I be my own trustee?
In many places yes, especially for a revocable living trust, but you should name a successor trustee to take over if you die or lose capacity.
What is the difference between a will and a trust?
A will takes effect on death and usually goes through probate, while a living trust operates during life and can continue after death.
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