Common Law Trust
A common law trust is a financial agreement by which a person or entity transfers ownership of assets to another person or entity through the creation of a trust deed. A common law trust is often simply referred to as trust and it is a private contract two parties to help grow the assets of the trust.
What makes common law trust unique is that it allows the trustee to have the legal title to assets while the beneficiaries of the trust enjoy the assets. This is a great legal structure for families and individuals with a sizable amount of assets.
Trusts are very common in wealthy families and institutions. It’s a vehicle for generational wealth as the trust is led by a trustee that makes smart investments on behalf of the trust. There are different types of trust structures and each one has its own specific advantages and disadvantages.
Common Law Trust Vs. Statutory Trust
The specific rules and regulations of a common law depend on the state. For example, the state of Delaware has ever-changing regulations regarding common law trusts.
Common law trusts are used when a statutory trust does not make sense because of state regulations or tax concerns. For this reason, it is sometimes referred to as a pass-through trust agreement. Common law trusts are regulated by the state's law jurisdiction.
Setting up a common law trust requires the following steps:
- Request an ID through World Service Authority. This process allows you to separate the common law trust from your individual social security number. You can also create an affidavit of Identification to avoid using a state or federal ID when opening a business bank account.
- Choose a co-trustee. Your co-trustee should be a person that you can trust as they will be an administrator to the trust.
- Purchase a P.O. box. This allows you to protect your anonymity because you can list this as your trust address.
- Create important business documents. You will need to create the necessary business documents including company bylaws and articles of incorporation.
- Choose a settlor/grantor. Request that the settlor/grantor offer a piece of property into the trust.
- Request an EIN number for the trust. This is for tax purposes.
- Open a bank account in the trust name. It is best to create a non-interest banking account that is private. It might be helpful to first open a personal account and then a trust account. All trust holders should be listed on the bank account.
- Register your trust documents with the Secretary of State. This is optional but may be helpful.
Common Law Trusts Vs Statutory Trust
Common law trust and statutory trusts have different requirements for filing and operating. Common law trusts are created without public officials. The individuals of the trust are eligible to legally sue, or be sued, for violating the terms of the common law trust. However, they must do so in their own name.
A statutory trust, on the other hand, is considered to be a juridical category. It is separated from the trusts parties and a legal lawsuit can be initiated in its name.
The statutory trust is often regarded as a type of business organization. Statutory trusts must follow these regulations:
- Listed rules are binding and cannot be overruled in the business documents.
- A statutory trust cannot have a donative purpose.
- There must be an entire document on trusts in the articles of incorporation.
- There must be a charging order provision included.
- Dissolution and conversion requirements must be included in the documents.
- Any relationship between the common law and statutory trust entities must be clearly listed.
In common law a trust doesn’t have to be recorded with the public. In common law the beneficiaries don’t have to have the knowledge of the benefactor, they don’t have to know who the grantor is. The trustee doesn’t have to disclose.