In the common law, a trust is a type of ownership (of real property, personal property, money or other valuables) where one or more persons controls the property (the trustees) for the benefit of one or more other people (the beneficiaries). Trusts are created in one of two ways:
- An explicit trust, where there is a clear intention to set up a trust; or
- An implied trust, where the circumstances create an obligation to act as if a trust exists
A trust does not exist merely because there is a fiduciary duty. For example, depositing money into a bank account does not create a trust even though the bank is being "trusted" with the money and must deal with it in a prudent manner. At law, that money still belongs to the depositor and must usually be returned on demand or on notice. Similarly, shareholders in a corporation are not beneficiaries of a trust, even though the directors and managers of the corporation must use the money provided by shareholders for the benefit of the shareholder - no trust exists because there is no obligation to ever return the money provided by the shareholder.
Hallmarks of a trust are generally:
- That the trustee has the authority to deal with the property in the trust as they see fit, without the permission of the beneficiary as long as it is consistent with the intention of the trust.
- The beneficiary is entitled, on adequate notice, to an accounting of the property in a trust.
- That, at some point in the future, the beneficiary will be entitled to payment from the trust or delivery of all the property in the trust and may legally enforce the payment or delivery at law.
For example, a wealthy person may place all their property within a trust during their lifetime. They may be both the trustee and beneficiary during their lifetime, but on their death another person becomes the trustee and uses the property for the wealthy person's beneficiaries. This is usually common to avoid complications like estate taxes or the prohibition against disinheriting a spouse.
A trust has a distinct legal personality apart from its founder, trustees and beneficiaries. Since it is not a corporation, it is not subject to reporting requirements.
- Lawyers typically have a "trust account". It can be used to hold money for a client for several purposes, such as security against payment of the lawyer's account, or as a deposit against a purchase of property. It is also not uncommon for a lawyer to set up a trust account for an estate in order to hold money pending distribution to the beneficaries as property is sold from the estate. In addition, if ownership of money is in dispute, a lawyer can also hold such money in a trust account until the dispute is settled.
- During a marital breakdown, if property is held by one of the spouses and it is likely it will have to be split during the subsequent divorce, there is an implied trust where the spouse with control over the property may not deal with it in a manner inconsistent with the interests of the other spouse. If they sell such property, they must generally retain any proceeds that may have to be distributed to the other spouse.
The trust does not exist under civil codes, which did not recognize the distinction between a trustee and a true owner and has no remedy to a beneficiary. However, in modern times, civil code legal systems have developed the patrimony of affectation, which is similar.