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Legacy Matters
BlogsPublications | September 29, 2023
5 minute read
Legacy Matters

Trusts 101: What is a Trust and How is it Created?

Trusts are valuable tools frequently used to transfer wealth within families, preserve and protect wealth, and reduce taxes. Despite their common use, many people have only a limited understanding of what a trust is or how one operates.

Understanding trusts and the role of the trustee is important for the people establishing trusts and the beneficiaries of those trusts.

In this first of a series of blog posts, we have provided some answers to frequently asked questions.

What is a Trust?

First, let’s discuss what a trust is not. Although we often talk about trusts as if they were a legal person or entity, a trust is not an entity in the same way that limited liability companies and corporations are.

Instead, a trust is a title-holding arrangement in which the title to or legal ownership of property is held by a person (the trustee) who must administer the property in the manner spelled out in the terms of the trust and the laws governing trusts. Although oral trusts are recognized in Michigan, in nearly all instances, the terms of the trust are set forth in a written document: a will or a trust agreement or declaration of trust.

The person who establishes a trust is known as the “settlor” or “grantor” of the trust. The people who will benefit from the property held in trust, now and in the future, are known as “beneficiaries.”

All kinds of property can be held in trust. Common kinds of property held in trust include real estate, bank accounts, investment portfolios, interests in family businesses, art and other tangible property, and life insurance policies. To be held in trust, assets must be transferred, assigned or acquired in the name of the trustee or the trust.

The distinguishing feature of a trust is the delivery of title to property to the trustee to hold in accordance with the terms of the trust – giving the trustee legal control of the trust’s assets. This control includes the power to retain or sell the property and invest or reinvest proceeds or income from trust assets, subject to the directions given in the terms of the trust.

One of the trustee’s most important powers is to distribute trust property to beneficiaries. Again, the ability to make distributions to beneficiaries is controlled by what the terms of the trust permit, require or direct.

Why Create a Trust?

Settlors create trusts for many reasons, including:

  • To hold and manage unique assets, such as closely held businesses and family vacation properties.
  • To protect and preserve assets so they can benefit multiple generations of the family.
  • To protect assets and provide for the needs of a disabled beneficiary.
  • To hold assets for persons too young to own or manage them.
  • To protect and manage assets for young beneficiaries until they mature.
  • To protect assets from creditors of the beneficiaries and to prevent loss as a result of a divorce.
  • To allow married individuals to care for and support a current spouse without disinheriting children from a previous relationship.
  • To avoid going to probate court following the death of the settlor.
  • To make funds available for the education, travel or entrepreneurial dreams of next generation family members.
  • To reduce estate, gift and generation skipping transfer taxes and achieve other tax objectives.
  • To create impactful philanthropy.

What Rules Govern the Trustee’s Administration of a Trust?

A trustee is one kind of fiduciary. With the power of a trustee comes significant responsibilities.

The most important duties of a trustee include:

  • The duty to follow the terms of the trust. The trustee must act in accordance with the terms of the trust rather than doing what the trustee – or the beneficiaries – think the settlor of the trust should have done.
  • The duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries and not in furtherance of the trustee’s own interests.
  • The duty of good faith. This duty is a corollary of the duty of loyalty. The trustee must act in good faith toward the beneficiaries.
  • The duty of care. The trustee must exercise due care when administering the trust.
  • The duty of impartiality. The trustee must act with the degree of partiality spelled out in the terms of the trust. In the absence of any specific direction, the trustee must treat all beneficiaries – current and future – fairly and cannot favor the interests of any one beneficiary or group of beneficiaries over other beneficiaries.
  • The duty to segregate trust assets. The trustee must keep the trust’s property separate from the property of the trustee.
  • The duty to invest trust assets. A trustee has a duty to invest assets either as prescribed by the prudent investor rule or as directed by the terms of the trust. As the name suggests, the prudent investor rule requires the trustee to invest in the manner a prudent person would invest after taking into consideration a variety of factors and circumstances.
  • The duty to provide information to the beneficiaries. The trustee must provide information about the trust to the beneficiaries, and this includes a duty to tell them the trust exists. The most important sharing of information typically occurs through the annual trust accounting. This lists the assets of the trust and their values. It also will enumerate the receipts and disbursements of the trust, including dividends and interest that was received, investment transactions, trustee fees and other expenses of administration that were paid, and the distributions made to the beneficiaries. The accounting is an important means of enabling the beneficiaries to monitor the trustee’s administration of the trust.

Trust beneficiaries have legal options in the event that the trustee fails to fulfill their fiduciary duties, such as asking the court to remove the trustee or seeking damages and the return of trustee fees.

Because serving in a trustee role requires specific knowledge about trust law, taxes and investing, many settlors choose a professional trustee, rather than a family member or friend to serve as trustee.

Trust Education

If you haven’t yet provided wealth education for your next generation family members, teaching them about their trusts is a great way to start. Our attorneys have created a variety of activities, for use at family meetings or as part of a larger wealth education plan, to help families provide their next generation members with an age-appropriate understanding of trusts. Contact your Warner attorney or Mark Harder at or 616.396.3225 to discuss options for personalized trust education for your family.