At least 31 US states and many foreign countries, like Singapore, permit organization of business entities as statutory trusts. These entities have trustees to manage assets, like family and other trusts that are set up to manage donated property, but they may operate active business entities. The risks of doing business, which could otherwise violate fiduciary duties to make “prudent” investments, and the liability that could attach to beneficiaries and trustees for business operations without a statutory liability shield, have encouraged business operation as corporations, or limited liability companies, or other entity types besides the trust form, in states without a statutory trust entity.
A surprisingly large amount of US business is done in the trust form, however. Professor Steven Schwarz, of Duke University, has estimated that the amounts of mutual funds and other public market types alone amount to trillions of dollars. (See Schwartz, “Commercial Trusts As Business Organizations”, 2003, http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1147&context=djcil, visited April 1, 2014.) Most mutual funds, many real estate investment trusts, and just about all “securitization” transactions, where trustees hold assets for an entity that sets up investment pools of loans, or contracts, or other third party obligations (such as portfolio company assets for a private equity group) use trusts, since the pass-through tax rules and legal obligations of fiduciaries to beneficiaries and settlors of (entities or persons who receive money from or set up the trust) can fit this form of organization fairly well.
Illinois does not yet have a statutory business trust, like Delaware and other states, but it does recognize land trusts as a way to hold real property as a “personal” asset. The trusts are common law trusts, but there are statutes that compel disclosure of beneficial interests in same. (765 ILCS 405/0.01)
Another reason trusts are used is for “asset protection.” Foreign country trust entities subject to IRS disclosure regulations. These include requirements for individuals. (IRS Form 8938:Statement of Specified Foreign Financial Assets, and instructions to same, as well as T.D. 9567, proposed and temporary regulations under IRC 6038D.) Foreign country banks and financial institutions are required to report asset accounts and trust interests held by US citizens to US taxing authorities after June 30, 2014. (IRC Sections 1471-1474, See Notice 2013-43.) This means that domestic trusts in other US states may be more attractive to users. They can be both bankruptcy remote, since not necessarily only part of an individual’s bankruptcy estate, when multiple beneficiaries are involved, and jurisdictionally remote, so less than convenient for creditors and other persons seeking to obtain the assets of the settlor of a self-settled trust, or other beneficiaries. These work, of course, only if transfers into the trust are not a fraud on creditors, since the Bankruptcy Code has a 10 year look-back period for which transfers that do defraud creditors can be avoided, and the assets put back into a bankrupt’s estate. (See generally http://www.forbes.com/sites/jayadkisson/2013/05/22/domestic-asset-protection-trust-comes-blows-up-bigger-than-alaska-in-huber-case/, visited April 1, 2014.)
The legal take-away: Look at trust forms if you have an asset that should be separated from the liabilities of an operating company, or managed by commercial trustees or as an investment pool, but do your planning as far in advance as possible, with clearly legitimate sources of all funds put into trust, so anti-fraud provisions of bankruptcy codes and other state statutes can’t overturn your arrangements.