Trust

What Is a Trust?

A trust is a legal relationship with three main roles. The person who creates the trust and transfers assets into it is usually called the grantor or settlor. The person or institution that holds legal title to those assets and manages them is the trustee. The people or organizations who ultimately benefit from the assets are the beneficiaries. The trust document spells out how the assets should be managed and distributed.

Trust assets can include cash, securities, real estate, business interests and other property. Legal ownership sits with the trustee, but the trustee must use the assets for the beneficiaries' benefit rather than for personal gain.

How Trusts Work

A trustee owes a fiduciary duty to the beneficiaries. This means acting prudently, keeping accurate records, avoiding conflicts of interest and following the trust's terms. Trusts are commonly divided into two broad types:

• Revocable trusts, which the grantor can change or cancel during their lifetime. Because the grantor keeps control, these trusts generally do not shield assets from the grantor's creditors.
• Irrevocable trusts, which generally cannot be changed once created. They can create greater separation between the grantor and the assets, but the grantor gives up much of the control.

Trusts are often used in estate planning to specify how property passes to heirs. Certain assets held in a trust may avoid probate, the court-supervised process for settling a deceased person's estate. Tax treatment depends on the trust type and jurisdiction, so the rules vary widely.

Trusts in Investing

Outside estate planning, the word also appears in investment vehicles. In the United Kingdom, an investment trust is a publicly listed company that pools investor money to buy a portfolio of assets. It is a type of closed-end fund, meaning it issues a fixed number of shares that trade on an exchange, so its share price can differ from the value of its underlying holdings. Despite the name, an investment trust is a company, not a trust arrangement of the kind described above.

Knowing which kind of trust is meant matters, because the legal protections, costs and tax consequences of each can be very different.