A trust is a mechanism that allows a person to enjoy the benefits of owning property without being the actual owner of the property. Trusts are often used as estate-planning devices to minimize taxes, to protect property from creditors, or to control the purpose of a gift. Typical recipients of trusts are family members and charitable organizations.

The Basic Structure of a Trust

The creation of a trust involves a severance of two aspects of title to property. While we ordinarily think of ownership as having a single identity, the law recognizes at least two attributes of ownership: the legal title to the property and the beneficial title to the property. The legal title is what we mean when we speak of title — it encompasses the right of possession and disposition of the property. The beneficial title is the right to the benefits from the use of the property. A person who owns a house might choose to rent it to a college student in return for monthly rental payments. The right to rent the property is the legal title to the property; the right to receive rent is the beneficial title to the property. If the owner chooses to live in the home, he is exercising both legal and beneficial title rights.

A trust divides the legal and beneficial title and places them in the hands of separate persons. The person who owns the property (the settlor or grantor), conveys the property to a trustee with the instruction that the trustee use the property for the benefit of the beneficiary of the trust. The trustee holds the legal title to the property — the power to possess and dispose of the property — but that title can only be exercised on behalf of the beneficiary. In the usual case, the settlor specifies the duties of the trustee in making distributions to the beneficiary.

The trust property can be any kind of property. Trusts have been created to manage real property or money. A trust can manage investments or the disposition of personal property. In some cases, trusts are created to manage business interests.

Inter vivos trusts

A trust created while the settlor is still alive is known as a living, or inter vivos, trust. Living trusts are created by a trust document signed by the settlor. The trust document is usually accompanied by another document that transfers ownership of the trust property to the trustee; this document can be a deed, a bill of sale, or any other document that transfers title. The trust document must specify the purpose of the trust, the duration of the trust, and include an enumeration of the trustee's duties.

A living trust can be revocable or irrevocable. A revocable trust can be dissolved by the action of the settlor. This power of revocation has specific tax consequences and makes the revocable trust less attractive as an estate-planning tool. It does, however, have other uses.

The settlor cannot dissolve an irrevocable trust. The transfer of the property is final — the trust will last as long as the trust purpose exists. There are specific tax- and estate-planning advantages to an irrevocable living trust and it is a quite commonly used device.

The trustee owes a duty to the beneficiary to properly manage the trust property and to provide periodic reports. Paralegals are often involved in gathering and summarizing the trust records for such reports. In addition, the trust may buy or sell property if permitted by the trust document. A paralegal can be extremely useful in preparing the necessary documents for this kind of transaction.

Testamentary Trusts

A trust created in a will is a testamentary trust. The property owned by the decedent passes to a trustee and is administered for a named beneficiary. These kinds of trusts can be used to establish charitable foundations, to minimize the taxable consequences of probate, or to prevent an irresponsible beneficiary from wasting the inheritance. Most testamentary trusts expire after a certain period.

Only charitable trusts are allowed to exist in perpetuity.