Basic Trust Terminology
What is a trust and why do I need one? A trust is a great estate planning tool when used effectively and in the right situation. But most people know very little about trusts and often times think their estate does not warrant a trust. Over the next several posts, I hope to provide more information about trusts in general and help you decide if a trust is something worth considering.
When dealing with a trust, it can seem like the document is speaking another language. Below is a quick primer of terms commonly used in conjunction with trusts. After all you can’t decide if a trust is right for you if you don’t know what it says.
Every trust has one. This is the person or persons who transfer the property into the trust. This person can also be referred to as the “settlor” or “trustor.” If you own the property and want to put it in trust for your grandchildren, you are the grantor/ settlor/ trustor.
A trustee is the person responsible for managing the trust property in accordance with the trust document. Trusts can have multiple trustees at the same time and have provisions for selecting successor trustees who take over when an original trustee resigns, dies, or is removed. A trustee can be an individual, a corporation, or a combination of the two.
This is the person or entity that takes over when an original trustee can no longer serve, whether from infirmity, death, or simple resignation.
The beneficiary is the person who benefits from the trust. This can be one person or multiple people. If there are multiple beneficiaries they do not all have to have the same interest in the trust. In some cases, a beneficiary does not even need to be living yet at the time the trust is created.
The corpus of the trust or the principal of the trust is the property that gets put into the trust. The property can be added at the time the trust is created and in some cases after the trust is created. Income that is generated in the trust and not distributed can become part of the corpus of the trust depending on the requirements of the trust document. The corpus can consist of property such as money, securities, real estate, etc.
A living trust is created during the grantor’s life time. Living trusts are commonly revocable. A grantor can retain power over the assets in the trust and can amend or revoke when necessary. For more on revocable trusts, check back soon for an article about the pros and cons of a revocable trust and another about the differences of a revocable and irrevocable trust.
A testamentary trust is created through a Will and meant to accomplish a specific purpose. A testamentary trust is the most common type of trust I draft as it is one of the best tools for parents to protect assets a minor child may inherit. While testamentary trusts are very common, thankfully, they are not as commonly funded. This is due in large part to parents surviving their children’s minority. Testamentary trusts are also the most common thing removed from Wills as a person’s children get older. Testamentary trusts can be used to achieve goals besides protecting assets of a minor. They can provide for beneficiaries that spend a little too freely or to provide for a specific purpose.
The situs of a trust determines the applicable laws to which the trust is subject. Generally, the situs is based on where a bulk of the corpus or grantor is located. It is important to consider the situs as it determines the rules, regulations, and taxes which apply to the trust.
This is a just a brief explanation of terms and in no way negates the need to speak with an experienced attorney about whether you would benefit from a trust. There are a myriad of different types of trust that have different benefits and drawbacks. It is best to consult with a professional when considering a trust to ensure it is properly drafted, funded, and meets your specific needs.