What is an Employee Trust?

An employee trust is a unique type of trust that may be offered as part of a company's benefit package. Also called an employee benefit trust, an employee trust is created by an employer. An employer may offer different types of employee trusts for the benefit of those who work for the company. Two of the most commonly created, however, are the employee stock ownership program (ESOP) and the pension fund.

An employer creates this type of trust to benefit its employees. In such a case, the employer is the grantor, which basically means the employer established the trust. The company's employees are then considered the beneficiaries of the trust. As with other types of trusts, the person who is charged with its management is referred to as the trustee.

In order to understand what an employee trust is, a person must first have at least a basic understanding of how trusts work. A trust is a legal arrangement in which a party, called the trustee, holds and manages assets on behalf of those who stand to benefit from the trust. These people are called beneficiaries, and when an employee trust is established, the employees are the beneficiaries. Sometimes a company's former employees may be included as beneficiaries as well. Employee trusts are usually discretionary, which means the trustee has a good deal of say so in how the trust is administered and often decides who should receive shares and when they should receive them.

One example of an employee trust is called an ESOP. With this type of arrangement, an employer contributes money to the trust. In some cases, a company may contribute stocks instead of or in addition to cash. The trustee is given the job of buying stocks on behalf of the employee trust, managing the investments, and allocating shares.

With an ESOP, employees have individual accounts and receive shares of the trust. Usually, all of a company's employees or all of those who work full time are eligible to receive share allocations. Often, the allocation an employee receives depends on how much money he earns, but some companies make allocations depending on the length of time employees have worked for the company. With this type of employee benefit, the employee doesn't have to make any sort of contribution. The employer makes the contributions, and each employee's wages and other benefits typically remain the same.