How trusts work

By Dan Danford

News broke today of Michael Jackson's will, which was filed in court. Mr. Jackson left his estate to a trust. This prompted the question, "What is a trust? How does it work?" and we're happy to answer that here.

The concept of trust originated in the Middle Ages when crusaders left someone behind to care for their family and property. The trustee watched over their stuff and made financial or other decisions on their behalf. If necessary, they bought and sold property, reached investment decisions, or spent money for necessary items. Legally, they "stood in" for the missing person.

Today's trust is similar. It's a legal form of ownership with several key parts. The Grantor is the person creating the trust. The Trustee is the person (or institution) who stands in the grantor's place. The Beneficiary is the person for whom the trust exists. In a so-called living trust, the same person can serve in all three capacities. However, a Successor Trustee is named to take over when the trustee is unable or unwilling to serve. Trustees can be a bank, trust company, or friend.

In estate planning, the trust is an important vehicle because it allows a trustee to care for and invest for a beneficiary, often long after the grantor is dead. It's a way of assuring that a spouse, children, or grandchildren get professional guidance for taxes and investments. It's also a way to establish some guidelines about how money should be invested or spent.

Importantly, a trustee has a fiduciary duty to beneficiaries. That means a legal duty to serve in their best interests. Decisions must be made according to the best interest of each beneficiary, without conflict. For this reason, a trust can be a good way to care for important friends or relatives after we are gone. Especially if they are young, inexperienced, or have special needs.