You may hear people talking about how they set up a trust for their children
or they set up a trust as part of their estate plan; but you may be wondering,
what exactly is a trust and how does it work?
When someone owns an asset, for instance stocks, they own both 1) the legal
title to the asset and 2) the beneficial use of the asset. The beneficial
use means they receive the income that the stocks generate. Sometimes,
the owner wants to give the legal title of the asset to one person but
give the beneficial use of the asset to another person. For instance,
if the owner has a minor child, he may want to give the legal title to
someone who is not a minor to hold it on behalf of the minor child; but
have the minor child receive the income generated by the asset. This is
when a trust may be used.
A trust can be visualized as a bucket. The bucket can hold assets like
stocks. The purpose of the bucket is divide the legal title from the beneficial
use and give the legal title to one person and the beneficial use of the
asset to another person.
A trust generally has three participants. The first participant is the
Settlor. The Settlor is the person who owns the stocks and sets up the
trust. The second participant is the Trustee. The Trustee is the person
who the Settlor gives legal title to stocks in order to put them in the
bucket (the trust) on behalf of the third participant, the Beneficiary.
The Beneficiary is the person who receives the benefit, the income generated
by the stocks, that the Trustee is holding in the bucket (the trust).
Trusts can be useful and appropriate in many situations and can range from
simple to complex, but they are all based on this concept that property
is put in a trust (the bucket) so that the legal title can be separated
from the beneficial use.