Legal Definitions - trust

A trust is a legal arrangement where one person or entity (the grantor or settlor) transfers assets to another person or entity (the trustee) to hold and manage for the benefit of a third party (the beneficiary).

Essentially, a trust separates the legal ownership of assets from the beneficial enjoyment of those assets. The trustee holds the legal title, meaning they have the authority to manage the assets, but they are legally bound by a "fiduciary duty" to act solely in the best interests of the beneficiary. The beneficiary, in turn, receives the benefits and income generated by those assets, even though they don't directly own them.

Key parties in a trust include:

• Grantor/Settlor: The individual who creates the trust and transfers their assets into it.
• Trustee: The individual or institution legally responsible for holding, managing, and distributing the trust assets according to the grantor's instructions. They have a strict legal duty to act in the beneficiary's best interest.
• Beneficiary: The person or people who receive the benefits, income, or assets from the trust.

Here are some examples of how trusts are used:

• Example 1: Providing for a Minor Child's Future

  Imagine a parent, Sarah, wants to leave a substantial inheritance to her 10-year-old daughter, Emily. Sarah is concerned that Emily is too young to manage a large sum of money responsibly if she were to receive it outright. Sarah decides to create a trust. She names herself as the grantor, her sister, Lisa, as the trustee, and Emily as the beneficiary. Sarah transfers a significant amount of money and investments into the trust. The trust document specifies that Lisa will manage these assets, investing them wisely, and will distribute funds for Emily's education and living expenses until Emily turns 25, at which point she will receive the remaining principal. This illustrates how Lisa, as trustee, holds legal title and manages the assets, while Emily, the beneficiary, enjoys the financial support and future inheritance, all according to Sarah's wishes.

• Example 2: Managing Assets for a Loved One with Special Needs

  Consider the Rodriguez family, who want to ensure their adult son, Marco, who has a disability, is financially cared for throughout his life without jeopardizing his eligibility for government assistance programs. They establish a "Special Needs Trust." The parents are the grantors, and they appoint a professional trust company as the trustee. Marco is the beneficiary. They fund the trust with assets, and the trust company manages these funds, using them to pay for things that government benefits don't cover, such as specialized therapies, recreational activities, or personal care items. The trustee's fiduciary duty ensures the funds are used appropriately and in Marco's best interest, preserving his quality of life while maintaining his eligibility for other crucial support.

• Example 3: Charitable Giving and Endowment Management

  A philanthropist, Mr. Chen, wishes to donate a large sum of money to his alma mater, a university, to fund scholarships indefinitely. Instead of giving the money directly, he establishes a charitable trust. Mr. Chen is the grantor, and he appoints the university's endowment fund management committee as the trustee. The university itself is the beneficiary (specifically, its scholarship program). Mr. Chen transfers a substantial portfolio of stocks and bonds into the trust. The trust agreement dictates that the trustee will invest these assets and distribute a certain percentage of the earnings each year to fund scholarships, ensuring the principal remains intact to generate income for future generations of students. This demonstrates how the trustee manages the assets for the ongoing benefit of the university's students, fulfilling the grantor's charitable intent.