Trusts can be very complicated. Sometimes, it is good to “put the grass down where the sheep can eat it.” As such, this column will give a broad overview of the common components of a trust. No matter the kind of trust you have, it must include these five elements:

1. Grantor(s). This is the person who forms and transfers property to the trust. Other terminology used for this person are “settlor” or “donor.”

2. Trust property. The property transferred to the trust is sometimes called the corpus of the trust. Sometimes a trust is funded during the grantor’s life, or it may remain unfunded until a triggering event, such as the death of the grantor.

For example, 10 years ago or more, many farmers formed a trust as part of their estate plans and funded their trusts with their farm real estate at the time the trust was formed. Now, it is increasingly more common for the farm real estate to be transferred to the trust at the time of death using a transfer on death deed and keeping the trust unfunded until such time.

3. Trustee(s). This is the person or people responsible for managing and administering the trust. The trustee will hold legal title to the trust’s property; however, beneficial title is held by the beneficiaries of the trust. The trustee will owe a fiduciary duty to all the trust’s beneficiaries.

For example, many farm couples are both the trustees and beneficiaries of their trust while either is alive. At the time both farm spouses are deceased, one or more of the children are the trustee(s) (holding legal title to the trust assets), and all children are beneficiaries (holding beneficial title to the trust assets).

4. Beneficiary(ies). The beneficiaries of the trust are the people who are designated to receive the benefits of the property transferred to the trust. The trust document usually directs that, upon the death of the grantor or grantors of the trust, the assets of the trust are distributed out to the beneficiaries and the trust is terminated. However, it is possible that beneficiary interests are split up over time.

For example, there may be income beneficiaries who receive distributions during their lives and remainder beneficiaries who receive the trust property thereafter.

5. Trust agreement. The trust agreement is the legal document signed by the grantor(s) which transfers assets to the trust and names the trust’s trustee(s) and beneficiaries. The provisions in the agreement are also essential for the correct classification of the trust for federal income tax purposes.

For example, in a typical trust established by a farm couple for estate planning purposes, the trust is disregarded for federal income tax purposes while either spouse is alive and uses one or both of their social security numbers for income tax reporting purposes. However, at the time both spouses are deceased, the trust must obtain its own tax identification number and begin to report its income on its own tax return.

Trusts are becoming more common in estate and farm planning. Trusts help to carry out the transfer of farm assets in an orderly, preplanned manner while minimizing probate and other costs. It’s important to understand them.