Common Law Trust Vs. Statutory Trust
Common law trust vs. statutory trust is the difference between two crucial types of legal trusts.3 min read
Updated October 26, 2020
Common law trust vs. statutory trust is the difference between two crucial types of legal trusts. It is important to first distinguish the difference between the two before deciding which one is right for your situation.
Statutory trusts involve real property that is held by a trustee with the intention of selling. Any profits from the real property including rent and sale profits go into the trust. These profits are then paid to the benefactors of the trust. This process is regulated by the Uniform Statutory Trust Entity Act (USTEA).
Many businesses choose a statutory trust for the following reasons:
- Statutory governing laws are regularly updated.
- Consistent judicial decisions offer a sense of predictability to statutory trusts.
- Because statutory trusts are separate from the individual, the trust does not terminate or cease to exist after the incapacitation or death of a trust holder.
- Statutory trusts have bankruptcy features not available in a common law trust.
- All internal affairs are carefully regulated.
- They are simple and inexpensive to form. The application process includes a short form application and a trust agreement.
Common Law Trusts
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.
Consider the differences between a common law trust and a statutory trust to determine which is best for you. If you need help with choosing common law trust vs. statutory trust, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top five percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.