What Is a Nominee Trust and How Does It Work?

A nominee trust is a legal arrangement, primarily used in Massachusetts, where one party holds the title to property, most often real estate, for the benefit of another. This structure is used to maintain the privacy of the actual owners or to simplify future property transactions. The person or entity holding the legal title, known as the trustee, has no independent power and acts only upon the direct instruction of the true owners, who are called the beneficiaries. The trust itself is a passive entity that separates legal ownership from beneficial ownership, which can be useful for consolidating multiple properties under one name or streamlining ownership transfers.

Key Roles and Core Documents

A nominee trust operates with two distinct roles: the trustee and the beneficiary. The trustee is the individual or entity that holds the legal title to the trust’s assets. Despite being the legal owner on paper, the trustee has no authority to make independent decisions about the property. Their role is purely administrative, and they are bound to act only upon the written directions of the beneficiaries.

The beneficiaries are the true, underlying owners of the property held by the trust. They retain all control and receive all the benefits derived from the assets. Beneficiaries have the exclusive right to direct the trustee in all matters, such as selling, mortgaging, or leasing the property.

This relationship is formalized through two primary documents. The first is the Declaration of Trust, a public document that establishes the trust’s existence, names the trustee, and outlines the trustee’s limited powers. The second document is the Schedule of Beneficiaries, which is kept private and identifies the beneficiaries and their respective ownership percentages.

Information Required to Establish the Trust

Before a nominee trust can be formally created, several key pieces of information must be gathered. The first step is selecting a unique and identifiable name for the trust. This name will appear on the Declaration of Trust and all future legal documents related to the property.

Next, the full legal names and addresses of all individuals or entities who will serve as trustees must be collected. Since the trustee is the legal titleholder, this information is required for the public record and is entered into the Declaration of Trust.

Simultaneously, the full legal names of all beneficiaries must be identified, along with the specific percentage of ownership each will hold. This allocation of interests is documented in the private Schedule of Beneficiaries. This schedule dictates how income is distributed and how voting power is apportioned when directing the trustee.

Recording the Nominee Trust

Once the Declaration of Trust is drafted and signed by the trustees, it must be officially recorded. This step involves taking the executed document to the Registry of Deeds in the county where the real estate is situated. The recording process makes the trust a matter of public record.

This public filing officially transfers the legal title of the property to the trustee under the name of the nominee trust. It serves as notice to third parties, such as lenders or potential buyers, that the property is held in a trust. The recording fee varies by jurisdiction and is a necessary part of finalizing the trust’s legal standing with respect to the real estate it holds.

Federal Income Tax Treatment

For federal income tax purposes, a nominee trust is generally considered an agent for the beneficiaries. The trust itself does not have a separate tax identity and is not required to file its own income tax return. The Internal Revenue Service (IRS) essentially looks through the trust to the true owners of the assets.

All items of income, loss, deduction, and credit generated by the property flow directly to the beneficiaries. Each beneficiary is responsible for reporting their proportional share of these tax items on their personal income tax returns. This share is determined by the ownership percentages in the private Schedule of Beneficiaries.

To formalize this relationship with the IRS, the trustee may file Form 56, Notice Concerning Fiduciary Relationship. This form notifies the IRS that the trustee is acting as a fiduciary for the beneficiaries regarding tax matters. This helps ensure that any tax correspondence is directed to the appropriate party.