Trust

Meaning of trust

The Hague Convention describes a trust as a relationship in which a settlor places assets under a trustee's control for beneficiaries or a specified purpose. It identifies separate property, title held by or for the trustee, and the trustee's duty to manage assets under the trust terms as its characteristics.^[1]

Jersey law describes a trust through property held by a trustee for someone else's benefit or for a purpose beyond the trustee's own benefit. Its definition includes people who are not yet identified or do not yet exist as beneficiaries. Bermuda's statute uses a closely related description, covering arrangements created during life or on death.^[3]

These descriptions give neighboring terms distinct roles. A settlor provides property or creates the arrangement, a trustee holds or controls it and carries out its terms, and a beneficiary may receive its benefit. Trust property means the property held under the arrangement. The Hague Convention also says that a settlor's reserved powers, or a trustee's status as a beneficiary, do not by themselves rule out a trust.^[3]

How the IRS uses the term

For U.S. federal tax classification, the IRS regulation describes an ordinary trust as an arrangement in which trustees hold title to protect or conserve property for beneficiaries. Beneficiaries generally receive benefits without sharing responsibility for managing the property. The regulation says beneficiaries may create an arrangement that still qualifies when they remain in the same relationship to it as beneficiaries of a trust created by others.^[2]

The legal label alone does not settle the federal classification. An arrangement formed to run a profit-making business may be classified as a business entity, even if trustees hold legal title for beneficiaries. The IRS also provides specific rules for investment trusts. For example, an investment trust with one ownership class is classified as a trust if its agreement does not grant a power to vary the investments.^[2]

The IRS regulation determines classification for federal tax purposes, while the Hague Convention and the territorial statutes describe trust relationships and governing law.^[2]

Governing terms and administration

Under the Hague Convention, the settlor's chosen law governs the trust when the choice is express or implied in its instrument or written evidence. If no effective law is chosen, the law most closely connected to the trust applies. The Convention points to administration location, asset location, trustee residence or business, and the trust's purposes and where they are fulfilled.^[1]

The law identified under that Convention governs validity, construction, effects and administration. It addresses trustee appointment and removal, trustee powers, relations with beneficiaries, distribution, variation or termination, and accounting duties. A distinct aspect, especially administration, may be governed by another law when it can be separated.^[1]

Jersey's statute calls the applicable jurisdiction's law the trust's proper law. It looks first to the law expressed in the trust terms, next to the law implied by them, and, failing either, to the law of the jurisdiction with which the trust had the closest connection when it was created.^[3]

Express trust

For federal classification under the Internal Revenue Code, the regulation describes an ordinary trust as an arrangement created by will or inter vivos declaration in which trustees hold title to protect or conserve property for beneficiaries who generally cannot share that responsibility as associates in a business conducted for profit. It distinguishes business or commercial trusts and provides that trust form alone does not prevent classification as a business entity.^[2] Jersey law describes a trust as existing when a trustee holds property without owning it in that person's own right, for an identified or unidentified beneficiary, a purpose beyond the trustee's own benefit, or both.^[3]

Questions and answers

Related terms

• Proper law of a trust: The Jersey Trusts Law defines proper law as the jurisdiction's law expressed or implied in trust terms, or most closely connected to the trust when created.
• Settlor: A settlor is associated with creating a trust or placing property into it.
• Recognition of a trust: The Hague Convention describes recognition of a trust, its minimum legal effects, and limits tied to applicable law. Jersey law also addresses recognition.

Related guides and articles

• What a trust means under U.S. and international law: Trust terms and structure, the Hague Convention's rules, and U.S. tax classification and limited reporting rules, all explained plainly for U.S. citizens.
• Settlor, trustee and beneficiary roles: Trust structure and the roles of settlors and of trustees, and of beneficiaries, tied to the IRS instructions for Form 3520 that apply to U.S. citizens.
• The Hague Trusts Convention explained: The Hague Trusts Convention addresses which law governs a trust and how a trust is recognized, while preserving each state's fiscal powers over trusts and tax.

Related pages

• Glossary: All terms.
• Trustee
• Unit trust
• Beneficiary
• Charitable trust
• IRS forms