What is a Trust?
In Louisiana, a trust is defined as a relationship between three people. The relationship is created when Person A gives something to Person B for the benefit of Person C. Person A is known as the Grantor, the person who funds the trust. Person B is the trustee, the person who administers the trust. Person C is the beneficiary, the person for whom the trust exists.
How Trusts Work
For example, imagine that a parent, Amy, gives her house to her son, Bill. Amy and Bill agree that her daughter, Carol, will always get to live there. This understanding is in fact a kind of trust. In an informal trust like this, there is no written document. The trust is the relationship between Amy, Bill, and Carol.
The problem with an informal trust is that it might be difficult to enforce Carol’s right to live in the house. Without a written document to record Amy’s intentions, on paper it just looks like the house belongs to Bill. As a result, if Bill is ever sued or goes bankrupt, his creditors could seize the house to pay his debts. Another risk is that Bill could die and the house would pass to his heirs, potentially leaving Carol out in the cold.
Those risks are why most people formalize the trust relationship with a legal document. The trust document names the three parties in the relationship – the grantor, the trustee, and the beneficiary. Most importantly, the trust document also sets the rules for how the trustee must care for trust assets and when he should distribute them to the beneficiary. Finally, the trust document defines the trustee’s powers and responsibilities, and creates a distinct legal entity that can own property, pay taxes, and pass ownership of assets from one generation to the next.
In Louisiana, most trusts have at least two beneficiaries. The income beneficiary receives periodic payments or has the right to use trust property for a given period of time. The remainder beneficiary receives full ownership of the property when that period of time is over.
From the simple relationship between grantor-trustee-beneficiary, there are seemingly infinite variations that people have devised to use trusts to meet their needs. You can have more than one person in any of the three roles. You can even have one person serve more than one role at a time. For example, an individual can transfer assets into a trust and name himself as both trustee and income beneficiary, with his heirs being the remainder beneficiaries. This variation is what is known as a living trust.