Here's what we know about Donald Trump's trust fund
With all the talk about how Donald Trump will be handling his vast business empire as he assumes the presidency, some questions were finally answered this week, and this much is clear: Donald Trump is putting his business assets in a trust.
"Through the trust agreement, he has relinquished leadership and management of the Trump Organization to his sons Don and Eric, and a longtime Trump executive, Alan Weiselberg," says Sheri Dillon, a lawyer for the president-elect.
But what does that mean?
What is a trust to begin with? A trust is a legal structure with three main parties: The trustor, trustee and beneficiary. The trustor gives another party, the trustee, the right to manage the specified assets for the benefit of its designated beneficiaries.
"According to Trump, his sons, Donald Jr. and Eric, as well as a business associate, would be the trustees. After transferring the assets to the trust, Trump could then be a beneficiary of the trust," says David Reiss, professor of law at Brooklyn Law School. "The trustees administer the affairs of the trust on behalf of the beneficiaries. The beneficiary receives the income from the trust or the property within the trust."
Trump has previously said his children will be the primary financial beneficiaries of the trust, but Trump made it clear that he planned on returning to the Trump Organization when his presidency is over. At that point, it's possible Trump could have a fat check waiting for him, depending on the trust's structure.
"The trust's income or property could be doled out on an ongoing basis or deferred to some future point in time, depending on the terms of the trust," Reiss says.
When are trusts needed? Trump's situation is unique, and the calls for him to form a trust arose from the many potential conflicts of interests that would surely arise from his presidency. The core issue at hand here is that the American people want their president to have one goal and one goal only, and that is to act in the best interest of the country.
Because the Trump Organization is a sprawling, international business, conflicts of interest arise where there is a financial interest for Trump to make decisions or enact policies that may benefit his business instead of the American people.
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Trump cannot avoid dealing with foreign governments, and the Trump Organization has hotels in both the U.S. and abroad, creating a seemingly unavoidable conflict.
Typical uses for trust. That said, most people who use trusts aren't using them because they're about to become commander-in-chief.
In more typical scenarios, trusts can be used to control the flow of money to beneficiaries who may not be ready or able to handle the full amount by themselves. Depending on the way the trust is set up, they can also be used to reduce the size of a taxable estate, bringing down the tax bill upon one's death. Other uses for trusts can protect assets from heirs' creditors or former spouses, should there be a divorce, and trusts are commonly used in estate planning.
Advantages and disadvantages? Typically, trusts are simply used to provide for and protect one's family and loved ones, and are an excellent tool for wealth transfer, especially over multiple generations. They can also be used as mechanisms for giving to charity, so a lot of good can be done with them.
Additional advantages to trusts (depending on the situation) include privacy advantages, limited liability, and tax advantages, in addition to the positives mentioned above.
Still, nothing is without flaw, and trusts have their downsides as well. First of all, they're often expensive to set up, and so sometimes they can only make sense for the well-off or outright wealthy. They're also, putting it lightly, fairly intricate legal structures, which can make borrowing more difficult than it would be otherwise.
There are enough types of trusts – revocable and irrevocable, living vs. testamentary, grantor retained annuity trusts and credit shelter trusts – to write entire books on the many options trustors can pursue. Indeed, Amazon.com is oozing with them.
But the main reason for establishing a trust is always the same.
An ancient construct. "A trust is an agreement where the actual ownership of assets is separated from the use and enjoyment of the assets," says Duane Morris partner Michael H. Leeds, who is based at the law firm's office in Boca Raton, Florida.
While the Trump media frenzy may cause you to believe that trusts are a modern tool, that's not at all the case.
"Our concept of trusts is considered to date back to England during the Crusades," Leeds says. "Knights leaving to fight left their lands in the hands of trusted people to be held and managed for them until their return."
Trump's use of trusts defies critics. While Trump is using the legal structure of a trust to silence the media's roar and help quell fears of conflicts of interest, it falls well short of what many legal scholars were calling for, which was either a blind trust or a full divestiture (i.e. a sale) of his business.
With a blind trust, "the goal is to divest yourself of a cloud of a conflict of interest. Which is why blind trusts usually have an independent corporate trustee," says George Metcalfe, lawyer at the law firm Richman Greer.
Don Trump Jr. and Eric Trump can hardly be considered "independent."
Blind trusts are frequently entered into by public officials and judges, Metcalfe says, with officials in the executive branch using them the most frequently. Still, he says, "judges do it almost as a formality."
But the way the president-elect is retaining a stake in his business and maintaining the right to return when his presidency is over hardly accomplishes the stated goal of eliminating conflicts of interest. What he sows while in office can theoretically be reaped upon his return.
"I think we are going into an era of unprecedented blurred lines," Metcalfe says. "I don't think we've ever seen something like this."
So, put simply, is this Trump trust situation much different from Trump just saying, "Eric and Don, here are the keys, just run it for a while – I'll be back"?
"That's entirely within the possibilities, given what we've learned," Metcalfe says. "That's entirely within the possibilities."
Copyright 2016 U.S. News & World Report