The concept of a trust is difficult for many people to grasp because a trust is a concept, and therefore is intangible. Another intangible concept that is more familiar, and therefore seems easier to understand, is a corporation. Corporations have some similarities to trusts and, therefore, provide a helpful comparison. A quick look at the two concepts, how they are similar and how they are different, should in the understanding of trusts.
Though many people probably don’t really know or appreciate all of the legal mechanics of corporations, people are more familiar with them and see corporations in action. Corporate stock is traded on the stock exchange. People buy products from corporations. Corporations advertise on television. Corporations have employees, sell products, provide services and are part of the fabric of our lives. People do business with corporations every day.
Trusts are like corporations in the sense that the intangible concept has tangible reality. Corporations and trusts transact business, borrow and lend money and operate as a legal “person”. There are many differences in the mechanics, but the basic concept of an intangible principle having tangible reality applies equally to corporations and trust.
Trusts are a way that individuals own property for personal and family purposes just as corporations are a way that individuals own property for business purposes. In fact, trusts and corporations overlap to the extent that a non-profit organization can be carried on either as a trust or as a non-profit corporation. Both are governed by statutes that recognize and give legal validity to their form and effect, and both are further governed by documentation that dovetails with the statutory framework and extends it into the details of the particular trust or corporation.
The main differences between trusts and corporations are in the mechanics and purposes. In a corporation, the owners are the stockholders, and they appoint directors. The directors, in turn, appoint/hire the officers to oversee the day to day business of the corporation. Corporations are intended to operate businesses for profit for the benefit of the shareholders (the owners). Corporations act through the people who run them in their various roles. These roles are defined by statute and the documentation (bylaws, shareholder actions and by director actions). The agents of the corporation have the authority to bind the corporation by signing contracts, deeds, loan documents, etc. on behalf of the corporation. The directors and officers are accountable to the shareholders to run the corporation for the benefit of the shareholders.
Corporations operate by the same principles whether there are hundreds of thousands of shareholders or just a single shareholder. There are many things to be said about the corporate formalities in single shareholder corporations. But that isn’t the subject of this blog. If interested, you may read about them here.
Trusts have different mechanics. Trusts have beneficiaries, who are the people for whose benefit the trust is established and is to be handled. There are usually primary beneficiaries and successor and/or contingent beneficiaries. Trustees are the people designated with the responsibility and the authority to carry out the terms (instructions) of the trust and to make decisions when decisions need to be made. Trustees, like the officers of a corporation, are the ones who have the authority to bind the trust to contracts, deeds, loan documents, etc. The trustees are accountable to the beneficiaries to handle the trust for the benefit of the beneficiaries (much like directors and officers are accountable to shareholders in a corporation).
Trusts own title to property and exercise authority over title to property for the benefit of the beneficiaries of the Trust just as corporations own title to property and exercise authority over property for the benefit of the shareholders (owners). Trusts are usually set up for private, personal purposes; whereas corporations are set up for business and for-profit purposes. Both trusts and corporations (non-profit ones) can be used for non-profit purposes.
As noted above, non-profit, charitable organizations can be operated like a trust or like a corporation. The difference is in the mechanics and operational structure. Some charitable purposes may be better addressed in the trust format, and some charitable purposes may be better addressed in the corporation format. The advantages and disadvantages of the trust and the corporation format for charitable purposes are beyond the scope of this article.
Most people are more familiar with corporations because we deal with corporations and see corporations in action every day of our lives. Behind the activity we see is the fictional “person” of the corporation that is created, recognized and given authority by the law. Trusts are the same way, but we do not encounter them as often as corporations because trusts are not doing business in the marketplace, generally; they are established for more personal and private purposes. Bankers and financial institutions, however, see trusts all the time.
Trusts and corporations are related to the extent that they are created by the law to allow people to accomplish business or personal goals; they have authority to “act” like a legal “person” which they do through agents (trustees or directors and officers) who represent the entity of the trust or corporation on its behalf according to the bylaws (corporation) or trust document (trusts) and the authority structure created in them. Owning and handling property in trusts (for personal purposes) and corporations (for business purposes) have many advantages over owning and handling property individually, but that is also the topic for another time.Kevin G. Drendel Drendel & Jansons Law Group 111 Flinn Street Batavia, IL 60510 (630) 406-5440 (630) 406-6179 fax [email protected] foxvalleyestateplanning.com