Trust (law)
In law, a trust refers to a relationship in which the owner of property (or any other transferable right) gives it to a designated entity, usually described as a trustee. The trustee has a duty to safeguard and use the assets of the trust solely for the benefit of another person or group of persons until distribution, pursuant to the provisions of the trust. In the English common law tradition, the party who entrusts the property is known as the "settlor", the party to whom the property is entrusted is known as the "trustee", the party for whose benefit the property is entrusted is known as the "beneficiary", and the entrusted property itself is known as the "corpus" or "trust property".[1][2] A testamentary trust is an irrevocable trust that is established and funded pursuant to the terms of a deceased person's will. An inter vivos trust is a trust created during the settlor's lifetime.
For the monopolistic business, see Trust (business). For other uses of the word "trust", see Trust (disambiguation).
The trustee is the legal owner of the assets held in trust on behalf of the trust and its beneficiaries. The beneficiaries of a trust are equitable owners of the trust property. Trustees have a fiduciary duty to manage the trust for the benefit of the equitable owners. Trustees must provide regular accountings of trust income and expenditures. Trustees may be compensated for their services.Trustees may be compensated and be reimbursed for their expenses. A court of competent jurisdiction can remove a trustee who breaches their fiduciary duty. Some breaches of fiduciary duty can be charged and tried as criminal offenses in a court of law. A trustee can be a natural person, a business entity or a public body. A trust in the United States may be subject to federal and state taxation.
A trust is created by a settlor, who transfers title to some or all of their property to a trustee, who then holds title to that property in trust for the benefit of the beneficiaries.[3] The trust is governed by the terms under which it was created. In most jurisdictions, this requires a contractual trust agreement or deed. It is possible for a single individual to assume the role of more than one of these parties, and for multiple individuals to share a single role. For example, in a living trust it is common for the grantor to be both a trustee and a lifetime beneficiary while naming other contingent beneficiaries.[4]
Trusts have existed since Roman times and have become one of the most important innovations in property law.[5] Trust law has evolved through court rulings differently in different jurisdictions, so statements in this article are generalizations; understanding the jurisdiction-specific case law involved is tricky. Some U.S. states are adapting the Uniform Trust Code to codify and harmonize their trust laws, but state-specific variations still remain.
An owner placing property into trust turns over part of their bundle of rights to the trustee, separating the property's legal ownership and control from its equitable ownership and benefits. This may be done for tax reasons or to control the property and its benefits if the settlor is absent, incapacitated, or deceased. Testamentary trusts may be created in wills, defining how money and property will be handled for children or other beneficiaries.
While the trustee is given legal title to the trust property, in accepting title the trustee owes a number of fiduciary duties to the beneficiaries. The primary duties owed are those of loyalty, prudence and impartiality.[6] Trustees may be held to a very high standard of care in their dealings to enforce their behavior. To ensure beneficiaries receive their due, trustees are subject to a number of ancillary duties in support of the primary duties, including duties of openness and transparency, and duties of recordkeeping, accounting, and disclosure. In addition, a trustee has a duty to know, understand, and abide by the terms of the trust and relevant law. The trustee may be compensated and have expenses reimbursed, but otherwise must turn over all profits from the trust properties and neither endebt nor riskily speculate on the trust assets without the written, clear permission of all of the adult beneficiaries.
There are strong restrictions regarding a trustee with a conflict of interest. Courts can reverse a trustee's actions, order profits returned, and impose other sanctions if they find a trustee has failed in any of their duties. Such a failure is a civil breach of trust and can leave a neglectful or dishonest trustee with severe liabilities for the breach. It is highly advisable for settlors and in many cases trustees to seek legal advice before entering into or creating a trust agreement and trustees must take great care in acting or omitting to act to avoid unlawful mistakes.
Significance[edit]
The trust is widely considered to be the most innovative contribution of the English legal system.[7] Today, trusts play a significant role in most common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. In Curaçao, for example, the trust was enacted into law on 1 January 2012; however, the Curaçao Civil Code only allows express trusts constituted by notarial instrument.[8] France has recently added a similar, Roman-law-based device to its own law with the fiducie,[9] amended in 2009;[10] the fiducie, unlike a trust, is a contractual relationship. Trusts are widely used internationally, especially in countries within the English law sphere of influence, and whilst most civil law jurisdictions do not generally contain the concept of a trust within their legal systems, they do recognise the concept under the Hague Convention on the Law Applicable to Trusts and on their Recognition (partly only the extent that they are parties thereto). The Hague Convention also regulates conflict of trusts.
Although trusts are often associated with intrafamily wealth transfers, they have become very important in American capital markets, particularly through pension funds (in certain countries essentially always trusts) and mutual funds (often trusts).[11]
Common purposes for trusts include: