In comparison to other legal arrangements, a trust is actually a rather simple process. It consists of two main individuals: the settlor who creates and funds the trust with his or her property and the trustee who holds the legal title to this property. The trustee is responsible for protecting, investing and managing the trust property. The trustee and the settlor can be one in the same, but most often is a different individual, corporation, or charity (if the trust was designed for a charity). In certain situations, a beneficiary may also serve as a trustee.
This beneficiary is the person or group designated to benefit from the trust. Beneficiaries are not usually given legal title to the trust property, and therefore do not have the authority to reach it or spend it on their own. Rather, the trustee authorizes payments to the beneficiary at pre-determined times or at the trustee’s discretion. When and how often these disbursements occur is decided by the settlor and may come from the trust property, the interest earned, or both.
Trust arrangements are desirable in situations where the beneficiary is unable to manage large sums of money. This may be because the beneficiary is a child, incompetent, irresponsible or inexperienced with handling money.
You can create a trust using several different avenues. Some options include:
- Self declaration: a property owner can declare that he holds property in trust for himself or another person
- Transfer to a third person named as trustee
- Testamentary trust: you may leave a gift in a will to another person, in trust for a third person
The validity of a trust relies on certain elements. First, a settlor must deliver trust property to a trustee (unless the settlor is the trustee). There must be the intent to create a trust for the benefit of a beneficiary; the trust must be for a lawful purpose; and the trust agreement usually must be in writing.