What makes a trust unique and thus so effective?

Because few of us know what makes a trust unique and thus so effective for estate planning and asset protection purposes, few of us use this great tool.  This article is dedicated to explain this uniqueness.

For us to be able to answer our question, we will have to look at how a trust is created.  A trust is created when a person (called the founder or donor) places assets under the control of another person (called the trustee) to be administered separately from the trustee’s own estate for the benefit of beneficiaries.

From the above definition, you will see that a trust separates the control and ownership of an asset from the use of it.  This means that you, as a beneficiary, will be allowed by the trust to use the assets in the trust, while the responsibility of ownership does not lie with you.  It is like a company car- the company maintains it, but you are allowed to drive it.  No other entity has the unique ability.

To make this distinction clearer, we will illustrate it with two scenarios:

Scenario 1: Your assets in a company

Let’s say that you personally are a shareholder, holding 50% of the shares in a company.  Will YOU be able to sell, bequeath or donate your 50% shareholding to another person?  The answer to this question will most definitely be YES.  Why?  YOU have ownership and control over the shares.  You do not have to ask anyone’s permission to dispose of it.

From an asset protection point of view, if something goes awry, creditors will be able to attach your shares in the company.  This is because it belongs to you and thus forms part of your own personal estate.  You control it, so you can lose it!

Scenario 2: Your assets in a trust

Let’s take the same set of facts as in the above scenario.  The only difference now is that a trust is holding the 50% shares in the company.  Will you be able to sell, bequeath or donate the 50% shareholding to another person ?  The answer will be NO.  Why?  The trust is now the owner of the shares.  The trust is in control.  This means that the TRUSTEES will have to consult with one another (you may be one of the trustees).  You will not be able to make this decision on your own.

If something goes awry now, creditors will not be able to attach the shares as it belongs to a trust and thus does not form part of your personal estate.

This uniqueness makes a trust a powerful and useful tool with which you can minimize death taxes, provide for maintenance of an ex- spouse while retaining capital assets and protect insolvent family members and so much more.