There are virtually no limits to what the terms of a trust instrument can dictate, so long as the basic legal requirements are met.
The creation and use of trusts is a subject that is near and dear to lawyers and has been an active part of the practice of law for generations. Originally, the concept of a trust was unique to the Anglo/American system of common law but in recent years has been more widely accepted in jurisdictions that do not accept common-law principles.
Insurance agents have used trusts to act as the legal owners of life insurance policies for at least as long as there have been income and estate taxes. The use of a trust with life insurance can shift ownership of valuable assets to keep them out of a decedent's estate for purposes of estate and inheritance taxes. Trusts are also invaluable when used with certain types of business insurance transactions. Unfortunately, the general public is not always as knowledgeable about trusts and their uses as are lawyers and insurance agents.
In the United States, most jurisdictions easily permit the creation of trusts so long as a few simple rules are followed:
* The purpose of the trust must be legal.
* There must be a subject of the trust--i.e. an asset.
* There must be a person to establish the trust - usually called a "settlor," or a "grantor," or sometimes a "trustor."
* There must be a trustee who indicates a willingness to act as such.
Although there are numerous banks and trust companies that act as commercial trustees, it is also common for individuals to act as trustees, so long as they are not doing so as a commercial enterprise. Trusts are usually created by the execution of a written document that is usually referred to as an "indenture" or "trust agreement." However, trusts are also created by operation of law in situations where a court will require the imposition of a trust where it would be unconscionable not to do so.
Simply stated, a trust is a legal arrangement where the legal ownership of as asset or group of assets is separated from the beneficial enjoyment of the asset. The legal ownership is vested in the trustee and the beneficial ownership is enjoyed by someone else--a beneficiary. The beneficiary can be the settlor of the trust or a third person. It is not unusual for the settlor of a trust to name himself as trustee of the trust, keeping legal ownership of an asset he already owned, but for the benefit of someone else. Trusts can be created while the creator is alive (referred to as an "inter vivos" trust) or to begin after the creator has died (referred to as a "testamentary" trust) established by the creator's will.
The most useful element of a trust is that it creates legal obligations that are well understood in the law, but that are determined by the creator of the trust as specified in the trust document. There are virtually no limits to what the terms of a trust instrument can dictate, so long as the basic legal requirements are met. When it comes time to interpret a trust, which is often many years after creation, the courts will attempt to determine what the intent of the creator was at the time of the original establishment of the trust. The courts will then enforce what it determines that intent was.
Recent years have seen the increase in the use of trusts as business entities. Thus, many investment entities such as mutual funds, hedge funds and similar organizations have been formed as "business trusts." In many ways, a business trust acts in a similar fashion as a corporation except that it usually cannot have perpetual life and the beneficial owners of the trust assets are beneficiaries or "participants" instead of shareholders.