Let’s start with definitions: A trust is a legal arrangement concerning the ownership, use and distribution of property. A trust is also a legal entity having its own tax identification number.
A trust is created when the owner of property (the grantor) transfers legal ownership of the property to another person or trust company (trustee). The trustee is responsible for maintaining and protecting the property for the benefit of a particular person or persons (the beneficiary).
A trust is created only when a formal document called the trust agreement is executed. The trust agreement states the purposes of the trust, contains the terms and conditions by which the trust is to be administered and defines the terms and conditions by which the beneficiary may use or receive the property held in trust.
Trusts may be either revocable or irrevocable. As its name implies, a revocable trust can be changed, amended or terminated by the grantor while the grantor is alive. Irrevocable trusts likewise, as its name implies, cannot be changed, amended or terminated by the grantor.
Also, trusts may be either living trusts or testamentary trusts. A living trust is established while the grantor is alive. Living trusts are also referred to as “inter vivos trusts”. The testamentary trust is created by a will after the grantor has died.
How Trusts Work
Trusts are all about separation of ownership of assets. With regard to trusts, there is a clear and distinct separation between the legal ownership of the asset and the equitable ownership to the asset.
Legal ownership of an asset is referred to as legal title. Legal title to an asset gives one total control of the asset.
Equitable ownership of an asset is referred to as equitable title. Equitable title to an asset gives one only the benefit of use of the asset.
