A common law trust is a contractual relationship — not a statutory entity. Where an LLC is created by filing Articles of Organization with a state's Secretary of State, a common law trust is created by a private trust instrument (sometimes called a trust indenture or declaration of trust) between a trustor, a trustee, and one or more beneficiaries. Its legal basis is centuries of English and American common law and equity — not a state's LLC or business corporation code.
Structurally, three roles are always present. The trustor (also called the settlor or grantor) creates the trust and transfers property — the "corpus" — into it. The trustee holds and administers that property according to the terms of the trust instrument, owing fiduciary duties to the beneficiaries. The beneficiaries hold the equitable interest in the trust's assets and income, even though legal title sits with the trustee.
It's worth being direct about a common misconception: a common law trust is not a way to escape taxation, reporting requirements, or the reach of courts — and any promoter who tells you otherwise is describing a "pure trust" or "constitutional trust" scheme that the IRS has repeatedly and successfully challenged. A properly formed common law trust is fully subject to federal tax law under IRC §§ 641 and 671–679, and its trustee has real fiduciary and reporting obligations. What a common law trust actually offers is structural and privacy-related — not a legal shield against tax law.
What is a common law trust?
- What it is
- A contractual relationship created by a private trust instrument — not an entity chartered by a state.
- The three roles
- Trustor (transfers property), trustee (holds and administers it under fiduciary duty), beneficiary (holds the equitable interest).
- Legal basis
- Centuries of common law and equity, plus the Uniform Trust Code and state trust statutes.
- Tax status
- Fully taxable. Governed by IRC § 641 and the grantor trust rules at IRC §§ 671–679.
- What it is not
- Not a way to escape tax, reporting, or the reach of courts. Any promoter claiming otherwise is describing a scheme the IRS has repeatedly challenged.
How do you set up a common law trust?
- Decide what the trust is actually for — asset protection, estate planning, or holding an operating entity.
- Identify who will serve as trustor, trustee, and beneficiary; these should not all collapse into one person without advice.
- Have the trust instrument drafted and executed, then obtain an EIN for the trust.
- Fund it — a trust that holds nothing protects nothing.
- Confirm the tax treatment with a CPA before the first filing deadline.
What the full article covers
- How a trust is actually funded and administered day to day
- The specific documents a properly drafted trust instrument contains
- How trustee liability works in practice
- A side-by-side comparison against statutory (DAPT) trusts
The member article continues with how a common law trust is actually funded and administered day-to-day, the specific documents a properly drafted trust instrument includes, how trustee liability works in practice, and a side-by-side comparison against statutory (DAPT) trusts.
3 more sections for members