Last week, I provided a very general definition of a limited partnership. This week, I’ll do the same for trust.
While we think of a trust as an entity, it’s really a series of relationships between the following individuals:
The “grantor” contributes assets (usually money) to the trust
The “trustee” holds the legal title to the assets, but must manage them for the “beneficiaries,” who have an equitable interest in the property. This split in ownership interests is one of the most unique aspects of the common law; for those in civil law jurisdictions, the idea that two people can have an ownership in property is very odd.
The “trust instrument” is written by the grantor. It provides the rules for the trustee, essentially telling his how to carry out his duties. The underlying concept is similar to a partnership agreement.
Here’s a basic example. A father places $100,000 into a trust which is managed by his bank’s trust department. He establishes the trust to pay educational expenses for this children. His lawyer writes a trust instrument that outlines the trust purposes, distribution scheme, investment policy and trustee’s duties and obligations.
This is a very general, 30,000 foot view. Trusts, like partnerships, are very complex concepts (you can learn a bit more here). Next week, we’ll dive into the differences between these two entities.
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