How Active Trust Works

Trusts are a type of legal agreement entered by at least three persons: the trustor or grantor, the trustee, and the beneficiary. The grantor legally entrusts a property title to an individual or legal entity with a fiduciary obligation to hold and manage it for the beneficiary. The grantor or trustor is the party who entrusts or transfers the property. The trustee is to whom the property is entrusted. The beneficiary is the party for whose benefits the property is entrusted. The property that is entrusted—which could be money or real estate—is the "trusted property" or "corpus." A fiduciary obligation is one party's legal duty to act in the best interest of another person or entity.

A standard trust is when you entrust a certain amount of money or asset to assure the financial security of your descendants once they reach a certain age when they are responsible enough to manage the said property without supervision. However, if your wishes are more complicated than the typical standard, you can decide to set up an active trust.

In the case of an active beneficiary, the grantor requires the trustee to carry out additional tasks other than passively caring for distributing property, as per the contract. Active trust is ideal when you want to make sure that the beneficiary can only spend entrusted money for specific purposes or fulfill a specific requirement before accessing or distributing the money. You can consider this as active trust because the trustee is required to distribute the property and verify that the beneficiary uses it for the desired purpose or meets the requirements.

Example of Active Trust

You can decide to set up an active trust so you can dictate how your beneficiary uses the asset. For example, you want to transfer your wealth to your son but don't want him to invest in cryptocurrency. You can set up an active trust which stipulates that he should not spend the money on that specific industry. The trustee will have to carry out the additional duties of verifying that all your is not making any crypto investments.

You can also set up an active trust if you want your beneficiary to meet a specific goal or requirement. For example, if you have a daughter who has refused to get a degree and find a job. When planning her trust fund, you decide to add a clause that stipulates that she can only access the funds when she graduates from the university. She also must hold down a job for a minimum of three years. The trustee will have to make sure your daughter meets these requirements before they hand over the properties.