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A trust is a legal entity created under state or federal law by a property owner to hold property for the benefit of another, for various reasons. Every trust has an explicit, stated purpose for existing. Every trust can own, buy, and sell all types of property; and with the proper written provision, a trust can exist for an unlimited period of time (i.e., "irrevocable trusts").

The common characteristic of all trusts is this holding of property, real or personal, for the benefit of another. Sometimes property is formally transferred by its owner into the trust; other times, a property owner will declare he is holding certain property in trust for another. In either scenario, the property owner relinquishes his ownership rights to the trust.

Trusts are controlled by a trustee, a role that the law has defined as having the highest honor while requiring the utmost care. The trustee is a "fiduciary" to the beneficiaries of the trust, and is held to this, the highest of legal standards, in his or her performance of their duties. All trustees must act with the "punctilio of honor," famously noted by Justice Benjamin Cardozo in the US Supreme Court opinion, Meinhard v Salmon.

Failure to do so leaves the trustee personally accountable under the law. Beneficiaries can bring suit against the trustee for breach of fiduciary duty, which can involve not only the trustee's intentional acts of malfeasance but also any unintentional acts of negligence.

Why this severity? Because the trustee holds actual legal title to the trust assets and must administer, or oversee, these assets according to the express terms and provisions of the actual trust documents. The beneficiaries are those entitled receive benefits from the trust; however they do not hold legal title to the trust assets themselves. The trustee is the property owner for the life of the trust. The law is strict in recognition of the temptations that are inherent in this scenario.

Trusts take many different forms, and can be created under either state or federal law. For example, "a simple trust" is a term used within the Internal Revenue Code for a legal entity that is "not a grantor trust; is not required to distribute all of its income every year; does not make charitable contributions; and does not distribute the trust principal." (Internal Revenue Code §651)

Wills can create trusts, called "testamentary trusts." These trusts come into being at the moment of the grantor's death, passing property from the decedent's estate into the testamentary trust, usually as part of a prior estate plan.

Trusts can be created under state law with the proper written documentation. For example, "spendthrift trusts" are trusts which give the trustee great discretion in deciding whether or not to make distributions to beneficiaries. Situations where a trustee might decide not to distribute trust funds include when the distribution would ultimately go to a creditor should it leave the trust's ownership, or where the trustee is concerned that the distribution will be squandered by the beneficiary. Parents, for example, create spendthrift trusts to protect against the immaturity of their children in dealing with large amounts of valuable property.

"Real estate investment trusts" (REITs) were a form of trust created by Congress in 1960 to be used as investment vehicles, giving investors an opportunity to own or finance a portion of a specific real estate project. By giving the investor a percentage interest in a group of related, real estate assets held by the trust itself, real estate investment across the country was encouraged.

Real estate investment trusts own and operate income-producing real estate, including hotels and shopping malls. Beneficiaries own dividend-paying stocks of this investor commercial real estate, a percentage interest which they can sell.

Most of these REITs make their money by renting available space to consumers or businesses in their various holdings. Some hold interests in real estate securities, and others make a profit by funding real estate ventures. REITs usually provide high dividends, and yet they do not pay income taxes. Each beneficiary's dividends from the trust is taxed as their ordinary income.

More and more, trusts are being used improperly and therefore, more stringently monitored. Trusts are popular both as an unscrupulous means to evade taxation and as a method of laundering money obtained from criminal enterprises.

For example, a common tax evasion scheme involves first establishing a domestic trust and having the taxpayer transfer assets in into this first, domestic trust. On its face, this transfer gives the appearance that the grantor no longer has control of the assets. However, in tandem with the domestic trust, another, foreign trust has been created in a foreign, tax-haven country. Income and expenses from the domestic trust are then passed to this foreign trust, of which the taxpayer is the primary beneficiary. The taxpayer then removes and uses the income as his own, without including it on his personal tax return.

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