The concept of a trust is difficult for many people to grasp because a trust is a concept, and therefore is an intangible. Another intangible, but one that is more familiar, and therefore seems easier to understand, is a corporation. A quick look at the two concepts, how they are similar and how they are different may help people in understanding trusts.
Though many people probably do not really know or appreciate all of the legal mechanics of corporations, they see corporations in action.
- Corporate stock is traded on the stock exchange.
- People buy products from corporations.
- Corporations advertise on television.
- Corporations have employees,
- They sell products, provide services and are part 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, and directors appoint, and the officers 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 in their various roles that are created by statute and by documentation (bylaws, shareholder actions or meetings and minutes and by director actions or meetings and minutes.) The agents of the corporation have the authority to bind the corporation by signing contracts, deeds, loan documents, etc. 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. 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.
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, for 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. 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, private purposes.
Trusts and corporations are related – 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. In addition, we all understand that owning and handling property in trusts (for personal purposes) and corporations (for business purposes) have many advantages over owning and handling property individually (taxes, asset protection, etc.).