What Is A Trust?
While terms like ‘college trust’ and ‘trust fund baby’ are heard often in today’s world, not everyone knows what a trust is and what purpose it serves. Despite the many different types of trusts and the confusing legalese that often comes into play, understanding a trust isn’t as hard as it seems.
Simply put, a trust is a legal agreement by which one party places property or money in the care of someone, so that they can later distribute it to a third party. There are many situations in our daily lives in which we do this, without thinking about it. For example, say you (A) have a favorite book. Your friend (C) wants to borrow it, but by the time she’s able to visit and grab it, you’ll be out of town, so you ask your roommate (B) to hold onto it to give to your friend later. Essentially, you’re trusting B that the book will reach C in a proper amount of time and good condition. You and Friends B and C have just created a trust.
While the explanation above is fairly simple, there are many different kinds of trusts, which tends to get confusing. All trusts, however, have four essential components:
Someone – usually called a ‘trustor’ or ‘grantor’ – creates the trust. In the above example, you created it by entrusting the temporary ownership of your favorite book to Friend B.
A second person or agency, called a ‘trustee’ – Friend B in the above example – agrees to hold the trustor’s money or property for the third party.
The third component is the actual act of holding the assets, be they money or property. These assets are called the ‘principal’ or ‘corpus’ of the trust. The amount of money can change over time, and should. The trustee decides how it can best be used to the benefit of the third party (Friend C.) Whether spent, loaned, invested or saved, this ever-shifting collection of assets is called the ‘trust fund.’
The fourth component is Friend C, who is called the ‘beneficiary’ of the trust. This is the person to whom the assets will eventually find their way. The title of beneficiary can be held by more than one person at once.
Some trusts, like the book example, are meant to exist for only a short time. Some are very clear in expressing what purposes for which the trust can be used, while others leave it up to the trustee’s best judgement. Because the needs of trustors and trustees vary widely, there are many different types of trusts, with different sets of regulations, time spans, uses and restrictions.