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What Is A Trust And How Can A Trust “Own” Something?

According to Investopedia, “a trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.” This means, in part, that a trust is an agreement, not an entity.

But if a trust is just an agreement, how can a trust own anything?  An agreement can’t have assets, right?  

To the uninitiated this can be a little confusing.

When someone says they transferred assets to a trust, what they really mean is that they transferred title of the assets to the trustee, not full ownership. The trustee holds the legal title of the asset for the benefit of the beneficiary. Still confused? Don’t worry. It can be helpful to think of it like this… 

Generally, when someone thinks about “ownership” of an asset, they are thinking of both legal ownership (ownership of title) and beneficial ownership (ability to do what you want with the asset and ability to benefit from it). These things combined equal ownership in its highest form, also known as fee simple ownership. “Fee simple” is a legal phrase that barely anyone uses outside of law school, but it’s helpful here as an example. If you have fee simple ownership of a car you hold the title of the car (legal ownership), you can put flame decals on the car because it pleases you (ability to do what you want with the asset), and when you sell the car you can do whatever you want with the proceeds (ability to benefit from the asset).

A trust splits up fee simple ownership into smaller parts. The trustee has legal title, but the person who creates the trust and puts assets into it (aka the “trustmaker”) has predetermined how much control the person who manages the asset (aka the “trustee”) can exercise over the asset and who will benefit from the asset in the end. So, continuing with the car example, if you granted me a car in trust for the benefit of your children, I would hold the legal title to the car, but I would also have the legal responsibility to properly care for it (no flame decals unless they increased the market value) and your kids would be the eventual beneficiaries if the car was sold.

Since trusts are just an agreements, you can essentially structure them however you want (as long as it’s not illegal or a violation of public policy). This flexibility makes trusts a valuable tool with many different uses. E.g. Trusts are sometimes used instead of wills, trusts are used for tax planning (to minimize income taxes on appreciating assets, estate taxes, or both), trusts are used for asset protection or privacy reasons, and more. It’s not often that you come across a tool as versatile as the trust.

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