What it means
A trust is a legal arrangement in which one person, the settlor, hands assets to another person or company, the trustee, who must manage them for the benefit of named people, the beneficiaries. When the settlor makes this arrangement intentionally, it is a voluntary trust.
Most trusts that people talk about in everyday life are of this kind. Voluntary trusts can be created during a person's lifetime, in which case they are often called living trusts, or by a will, in which case they take effect on death.
They can be revocable, meaning the settlor can change or cancel them, or irrevocable, meaning the settlor generally cannot. The choice affects control, tax and protection from creditors.
People set them up for many reasons. Common purposes include providing for children or vulnerable relatives, passing on a business in an orderly way, avoiding the delay of formal estate administration and managing assets if the settlor loses capacity.
Charitable trusts are also voluntary trusts. The key legal elements are a clear intention to create a trust, identifiable assets and identifiable beneficiaries or purposes.
The trust document, often called a trust deed, sets out the trustee's powers and duties. Trustees owe fiduciary duties, which means they must act honestly and in the beneficiaries' interests.
Involuntary trusts, by contrast, arise without the owner choosing to create them. A court may declare a constructive trust where someone has gained property unfairly, or a resulting trust where the intention behind a transfer was unclear.
These are remedies, not planning tools. Tax and legal treatment vary widely between countries, and a trust that is set up wrongly can fail or produce unintended tax charges.
Anyone planning one should take qualified legal and tax advice.
In practice
Real-world examples.
Example
A business owner transfers shares in her company to a trust for the benefit of her three children. The trustee, an independent professional, manages the shares and distributes income as set out in the trust deed. When she retires, the business passes to the next generation without disruption.
Example
A couple creates a revocable living trust and places their home and savings in it. If either becomes unable to manage their affairs, the successor trustee steps in without a court process. They keep the right to change the trust at any time.
Example
A retired entrepreneur sets up a charitable trust with $1,000,000 to fund scholarships. The trustees award grants each year from the investment income, and the trust deed prevents the capital from being spent on anything else.
Case study
Seen in the real world.
Hollis Family Holdings is an illustrative, fictional family company run by a founder in her seventies. She wished to protect the business for her grandchildren but worried that her son, who would inherit directly, might sell it quickly.
On advice from a lawyer and an accountant, she created a voluntary irrevocable trust and transferred a majority of the company's shares to it. The trust deed named a professional trustee and a family adviser, and said that the shares could be sold only with the agreement of both.
The fictional arrangement protected the business from a hasty sale and gave the grandchildren a clear share of future income. The founder accepted that she had given up direct control and that changing the terms later would be difficult. Her advisers recorded that decision in writing. The fictional lesson is that a trust only works if the settlor genuinely transfers the assets, and the trustee is willing and able to carry out the role. The family also agreed an annual meeting at which the trustee reports on performance, distributions and costs. That routine keeps everyone informed and reduces the chance of disputes arising from surprise or silence. The trustee also keeps a written record of every decision, which gives the next generation a clear account of why the arrangement works as it does. The founder says the written record has already settled two family questions without any need for outside help.
Watch out
Common mistakes.
- Assuming a trust can be changed at will, when an irrevocable trust generally cannot be altered by the settlor.
- Creating a trust but never transferring assets into it, which leaves it empty and ineffective.
- Confusing a voluntary trust with a court-imposed one, which arises by law and is not a choice.
Questions
People also ask.
What is the difference between a voluntary and an involuntary trust?
A voluntary trust is created intentionally by the owner, while an involuntary trust is imposed by a court or by law to prevent unfairness.
Who controls the assets?
The trustee manages them according to the trust deed, and must act in the beneficiaries' interests.
Do I need a lawyer?
It is strongly advisable, because drafting and tax rules are complex and mistakes can be expensive, and a poorly drafted deed may fail to achieve what the settlor intended.
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