In a post from a day or so ago, there was a lot of support for a post discussing the legal concept of trusts in relation to estate planning. Some bullshitter said, "... I make $1 a year and hold no assets. Take charge of your assets so no one can take them from you."
A lot of people demonstrated an interest in knowing this faggot's secrets. I'm a tax lawyer, and there are a few points that the commenter failed to express. So I'm here to provide a general education in the world of trusts.
There's too much to cover in a single post, so I'm breaking it up over 4 posts.
Those posts are as follows:
What is a Trust? (Part 1 of 4)
For what purposes do you use a Trust? (Part 2 of 4)
Trusts & Marriage / Trusts & Divorce (Part 3 of 4)
The Death Tax & Trust Income Taxes (Part 4 of 4)
Before we begin, I'm going to nip this in the bud right now. There is no magic bullet. If you're presently in a marriage and you're looking for a way to hide assets in the event of a potentially impending divorce, well I'm here to tell you that you're going to have a bad time. (See Part 3 of 4).
If you're an employee working for someone else, then there's no magic way to hide your income in a trust to avoid paying income tax. (See Part 4 of 4).
My intention is to generally educate you as to what a trust is, what a trust can be used for, and what a trust likely can't do for you. For some of you, this will be super informative. For others, you're going to be disappointed to learn that there may not be a silver bullet to hide all of your shit and not pay any taxes. Anybody who tells you otherwise is trying to sell you something. And if they're a lawyer, they're likely violating a rule of professional ethics by trying to sell it to you. (See ABA Model Rule 7.3).
If you have any specific questions about how these topics might affect you or how you might benefit from them, please reach out to an estate planning lawyer near you. I am literally (I don't mean figuratively; I mean literally) incapable of answering your questions. (See Part 2 of 4).
So what is a 'Trust'?
To understand what a trust is, you have to understand how the law views property. And the first thing to grasp is the idea of property ownership. Property ownership might seem simple on the surface (either you own something or you don't, right?), but there is a lot of nuance to the idea of property ownership.
As an example, let's use the idea of a "company car," which is a situation where you work for a company and the company provides you a vehicle to use while you work for the company. Now, the company car is assigned to you. It's yours. But it isn't "yours." By which I mean, you have all the rights to use the car and to receive the benefit of driving around in it. But you likely don't have the right to repaint the car, and you certainly don't have the right to sell the car. You definitely don't have the ability to legitimately sell the car because you don't have the car's title. The car's registered title is not in your name; the car's registered title is in the company's name.
So the company car is a good example to point out the difference between "legal title" and "equitable title." As the employee, you hold equitable title to the car. The car is assigned to you. No one else gets to use it except for you. If you get pulled over, you're not going to be arrested for stealing the car because you enjoy the right to benefit from use of the car. But you do not hold legal title, meaning you don't have the right to do something like sell the car because you do not hold legal title to the car.
Right now, if you own property, like a house or a car or a bank account, chances are you hold both legal title and equitable title simultaneously. Generally, for the property you own, there is no separation between these two concepts. For example, I own a truck. I bought it. I can drive it when I want, I can lift it, I can replace the suspension, and I can slap a For Sale sign on it any time I want. I can do that because I own the truck. I hold both the legal title and equitable title to the truck.
But there's a consequence for owning both the legal and equitable title to the truck. because I own the truck, that means I can lose the truck under certain circumstances. If I defaulted on some debt that I owed to someone, they could conceivably take my truck from me and use it toward the satisfaction of that debt. They could take it from me because (1) I incurred the debt and (2) I owned both legal and equitable title to the truck.
On the other hand, instead of owning a truck, if I only had that company car to drive around in, then the guy suing me wouldn't be able to take the company car from me. Why? Because I don't own legal title to the car. Sure, I'm benefiting from the car's use and the car is in my possession; but I don't hold legal title, I only hold equitable title. For the guy suing me to be able to take the car, he would have to satisfy to the court that I (1) incurred the debt and (2) hold both legal and equitable title to the car. In this scenario, even though I did incur the debt, I don't hold both legal and equitable title; so I get to keep using the car, and the guy suing me can go piss off.
At this point, I want to point out that having a company car issued to you is just an illustration of the difference between legal and equitable title. In real life, while the company would in fact have legal title to the car, you as the employee would not hold equitable title to the car in this general scenario. It takes more than just allowing you to use the car to create equitable title.
A trust is created when the owner of property (holding both legal title and equitable title) gives the property to two other people and splits up the property's legal and equitable titles, giving legal title to one person and equitable title to another person. Then, the person holding legal title will have certain obligations to manage the property and to provide the benefits of the property to the person holding equitable title. Let's get the names correct here, the person holding legal title is the Trustee, and the person holding equitable title is called the Beneficiary.
So here's a classic scenario of a trust: mommy and daddy both die in an accident. mommy and daddy have a 10 year old child who survives them. when mommy and daddy died, they had $1M in cash in a bank account.
Well, the 10 year old can't be entrusted with control of the $1M. That'd be fucking stupid to leave all that money to him outright. Instead, being the smart people that they were, mommy and daddy set it up where in the event of their deaths, the $1M would go into a trust, with Auntie Ann as the Trustee, and Junior as the beneficiary. Auntie Ann would be obligated to properly manage the $1M until such a time when Junior would be capable of being responsible enough to handle it himself.
Now, the specific details of Auntie Ann's responsibilities and how and when Junior receives the cash is completely up to the terms laid out in the trust documents. Mommy and Daddy can pretty much make whatever terms they want, set almost any condition or limitation. For example, "Junior is to receive $50,000 a year, every year, until there is no more money left in the trust." Or, "Junior is to receive all of the money in the trust in one lump sum upon his 21st birthday."
There could be considerations for paying for Junior's college, paying for Junior's first house, paying for Junior's living expenses until he turns 18... the terms of the trust could be anything. And as the trustee, Auntie Ann is supposed to manage the money and disburse the money according to the terms of the trust documents. That's her job as trustee.
The whole point of giving legal title to the money to Auntie Ann is to prevent a scenario where Junior says, "I want to buy all of the tickets to DisneyLand!" Unless the trust documents state that the money can go towards something stupid like that, Auntie Ann must rightfully say, "stfu."
One more example. My buddy's mom has some fucked up issues involving addiction. My buddy and his sister both agree that if one of them were to die before mom, someone would have to take care of mom. Well, they both have life insurance policies that are designed to fund a trust that basically says whichever of the two of them survives the other, that person will receive the life insurance proceeds as trustee in trust for the benefit of mom (because mom can't be trusted to reasonably use the money for her own long term well-being).
So to conclude, the rights to property are broken down into legal title and equitable title. A trust is created when the owner of property gives away that property to two people: the trustee obtains legal title, and the beneficiary obtains equitable title. The trustee's job is to manage the property for the benefit of the beneficiary. The exact terms of how the trustee is supposed to do their job and how much benefit the beneficiary receives is almost entirely dependent on the terms of the trust instrument or trust document. You can pretty much set up the terms to be whatever you want.
In a nutshell, the division of property to two entities, the trustee and the beneficiary, is the definition of a trust.
FYI, if you have an institution in your town that's called "[whatever] Bank & Trust", they are a bank that also functions as a trustee. You can engage them as a professional trustee. That way, you don't have to worry about whether Auntie Ann is trustworthy and responsible enough to manage the trust; that bank is letting you know that they offer trustee services, and you can designate them as a trustee for the trust. The bank will charge a fee and deduct that fee from the trust assets in exchange for managing those assets (often, the fee will be a percentage of the total assets being managed).
This is the foundation of what a trust is. Next, I'll talk about what trusts are generally used for, and I'll later describe what they will likely fail to accomplish.
Edit: See my comment, below, for the links to Part 2 and Part 3 already posted.