Charitable Trusts

Trusts

What Is A Trust?

A trust is a form of ownership where a person or entity, called the trustee, holds assets for the benefit of another. The person who creates a trust is called the settlor. The settlor entrusts assets to the trustees. The trustees in turn become the legal owners of the assets (sometimes called the "trust corpus"). However, the trustees have a duty to manage the property for the benefit of the beneficiaries, as specified by the settlor. (In the U.S., the settlor may also be called the "trustor," "grantor," "donor," or "creator.")

Fiduciary Duty

The trustees owe what is known as a fiduciary duty to the beneficiaries. A fiduciary duty is a heightened standard of care, whereby the person who owes the duty is obliged to act with the utmost care for the benefit of the person to whom the duty is owed. In other words, trustees are bound to act in the best interests of the beneficiaries to whatever extent they are able.

Limitations

Most trusts are bound by the Rule Against Perpetuities. The workings of the rule are complex, as any lawyer will tell you, but the basic concept is simple — the trust must come to an end at some point in the future which can be determined. Generally this is upon the death of the donor or beneficiaries, although other structures are possible.

History

The concept of the trust was developed in England during the 12th and 13th centuries. The notion of private property was still somewhat nebulous at the time, and was in the process of being hashed out by the feudal system.

The concept was developed by English lords who left their lands to participate in the crusades. These lords would convey their lands to trusted friends to manage while they were away. Disputes often arose upon the lords' return, which were referred by the king to what later became known as the Court of Chancery. It was in this court that trust law was developed over the course of years.

Uses

Trusts are used for a wide variety of purposes. Here are just a few examples:

  1. Spendthrifts — The most familiar use of trusts is probably for the protection of spendthrifts. A

    parent who wishes to provide a lifetime income for an heir, but does not trust the heir's ability to manage money on

    his or her own, may place assets in trust to be managed for the heir's benefit. This structure is the standard

    "trust fund" that you often hear about when people refer to "trust fund babies" and the like.

  2. Charitable — Charitable trusts are the only sort of trust that are allowed to be formed to benefit a purpose or cause, as opposed to one or more individuals or entities. The cause must be charitable, as determined by the general law of charities. Charitable trusts are also unique in that they are immune from the Rule Against Perpetuities.

  3. Taxes — The tax consequences of doing anything using a trust are usually different from taking the same action with directly owned assets. Using the trust is often better for tax purpose than the alternative, and trusts are often used for that purpose.

  4. Wills and Estate Planning — Trusts are often created in Wills. Use of a trust allows the bequestor to have more control over how assets are used for the benefit of his or her heirs, and may also be used to avoid estate taxes.

This list is far from complete, of course. Trusts have proven, over time. to be a very flexible and useful form of ownership.

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