What Exactly is a Trust?

“Will trust own it?”

Clients often make statements like “the trust will own it?” and it requires clarification that this is not entirely accurate. Unlike a corporation, which is recognized as a separate legal entity in most countries, a trust does not exist as a tangible entity. Instead, it can be understood as a relationship between individuals concerning assets.

To grasp the concept, it is important to recognize that there are three fundamental aspects typically linked together:

  1. Ownership
  2. Benefit
  3. Control

A trust provides the potential to separate these elements, much like how employees of a company do not directly benefit from the profit they generate for the company.

At its core, trust represents a relationship involving three parties:

1. The settlor/grantor – the individual who establishes the trust.
2. The trustee – the person who legally owns and often manages the assets.
3. The beneficiary – the individual(s) who will ultimately receive the benefits from the assets. There can be multiple beneficiaries.

The interactions among these three parties are governed by a document or agreement known as a “trust deed.” This document outlines the roles of each party and the terms governing their operations in relation to the trust assets.

The trust assets consist of the assets contributed to the trust by the settlor/grantor (the term “settlor” is commonly used outside the United States, while “grantor” is preferred within the United States).

The settlor provides assets to the trustee, who holds them “in trust.” The trustee has a legal agreement, defined by the trust deed, with the settlor regarding the handling of these assets. The trustee may hold the assets, including in an offshore bank account, for the benefit of the beneficiaries. Eventually, the trustee distributes the benefits derived from the assets to the beneficiaries when the conditions specified in the trust deed are met.

For instance, it is common for grandparents to establish a trust to leave money for their grandchildren, rather than granting them an immediate inheritance. The trust may stipulate that the assets be held in trust until the grandchildren turn 18, at which point they receive their share. Alternatively, the assets may be used to cover educational and medical expenses for the grandchildren and future generations.

The situation can become more complex when the settlor is also a beneficiary or when the settlor assumes the role of the trustee. Additionally, there can be additional roles in the trust, such as a Protector. Furthermore, it is possible for someone to be considered a trustee, even if they are not officially listed as such, as long as they perform the duties of a trustee and exercise the corresponding powers.


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Pravia Trust

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Leigh on Sea
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