There are three fundamental parties to a trust: the grantor of the trust, the trustee, and the beneficiaries. The role and rights of each party is discussed in the following sections.
The grantor of the Trust
The person who creates a trust and transfers property to it is generally called the grantor. A grantor is sometimes called a settlor, maker, donor or trustor. In a living trust, the grantor retains the right to amend, alter or revoke the trust. In some circumstances, two or more people may decide to create a trust and are collectively referred to as grantors. Generally, both people must agree to amend, alter or revoke the trust.
Trustee and Successor Trustee
The person in charge of managing the trust, who is often the same person who created the trust, is called a trustee. In most states, any person or entity (such as banks, trust companies and some brokerage firms) who is capable of taking legal title to property, can be appointed trustee. Trustees have a legal duty (often called a fiduciary duty) to protect the assets of the trust and make certain that the purposes of the trust are followed.
The trustee is responsible for the management of the trust assets. The trustee has the legal title of the trust assets and the power to buy, sell, borrow against or transfer the trust assets. The trust agreement sets forth the rights, duties, and obligations of the trustee. In addition, state law imposes certain duties and obligations of trustees. The trustee need not be a resident of the state in which the trust is formed.
When a living trust is established, the grantor is usually also the trustee of the trust. The reason is simple—the grantor has managed the assets adequately before the assets are transferred to the trust and remains capable of managing the assets now that they are in the trust.
This brings to light a common misconception about living trusts. Many people believe that by transferring assets into the living trust, they lose control over the assets. That is absolutely not true. The grantor keeps full control over his or her property. As trustee of a living trust, the grantor can do everything he or she could do prior to creating the trust.
When the grantor is no longer able to serve as trustee, whether because of death, incapacity, or illness, the successor trustee named in the trust agreement takes over management of the living trust. The successor trustee has the same powers, rights, duties, and responsibilities as the original trustee. The successor trustee steps into the shoes of the original trustee. Court approval is not required to permit the successor trustee to begin acting. While the successor trustee has all the same powers, rights, duties and responsibilities as the original trustee, the successor trustee has no authority to alter, amend or revoke the living trust. His or her role is limited to managing the assets and distributing the assets to the trust beneficiaries in accordance with the desires of the grantor as set forth in the living trust agreement.
In some circumstances, such as illness or age, a grantor may choose not to continue to act as trustee of his or her living trust. Although the grantor may not be considered incapacitated as defined in the living trust agreement or under state law, the grantor may relinquish his or her role as trustee by a written statement to that effect. In such a case, the grantor retains the right to resume his or her role as trustee when he or she feels fit and able to do so. In addition, the grantor retains the right to remove the successor trustee and replace the successor trustee, either with the next person named in the trust to serve as trustee or with a person not named in the trust.
In the event of the grantor’s incapacity (as defined in the living trust agreement), the successor trustee will assume the role of trustee without a court determination of incapacity. This maintains the privacy of the grantor and his or her living trust as a whole and permits the management of the grantor’s assets without interruption or court supervision.
When married couples establish living trusts, they name each other as successor trustee of one another’s trust. Often, one or more adult children are named as successor trustees in the event neither husband nor wife is serving as trustee. It is not uncommon for parents to name two or more of their children to serve jointly as successor trustees. Generally, unless the trust indicates otherwise, both children must agree in order to take any action on behalf of the trust. However, a well-drafted trust agreement will provide that if more than two trustees are serving, the decision of a majority of the trustees controls.
In addition, most trusts contain provisions authorizing trustees to delegate responsibility for certain actions to one trustee. This is common when children live in different parts of the country. One child may be authorized to manage the trust assets on a daily basis, subject to review by the other trustees on a quarterly, semi-annual or annual basis. Another child may be authorized to make distributions to beneficiaries within certain monetary limitations.
The person who benefits from the trust is a beneficiary. The beneficiary is entitled to receive the benefits of the income and principal of the trust. There are several categories of beneficiaries—the primary beneficiary, the contingent beneficiary (sometimes referred to as a secondary beneficiary), and the remainder beneficiary.
The primary beneficiaries are the persons who are first to receive the benefits of the trust assets. In a living trust, there is typically only one primary beneficiary—the grantor. After all, the assets in the trust are his or her assets. Commonly, the grantor’s spouse is also a beneficiary of the living trust. If the granter has minor children or children who are dependent upon the granter for support, such as children who are disabled or in college, these children can also be named as beneficiaries of the trust.
Contingent beneficiaries are entitled to receive the benefits of the trust assets after the primary beneficiaries. Contingent beneficiaries are designated in the trust agreement to receive trust benefits in the future. In addition, contingent beneficiaries may also receive benefits from the trust in the sole discretion of the trustee. That is, if the trustee believes that the contingent beneficiaries need money, the trustee can pay money to the contingent beneficiaries. The identity of the contingent beneficiaries and the scope of their future beneficial interest in the trust can be changed by the granter at any time until the living trust becomes irrevocable (i.e., at the death of the granter).
When the trust becomes irrevocable upon the death of the granter, the contingent beneficiaries become remainder beneficiaries. Their right to future benefits of the trust cannot be altered, amended or revoked. This does not mean, however, that they will necessarily receive trust assets. In the case of a married couple, after the death of the grantor, the surviving spouse is commonly the primary beneficiary of the living trust. The living trust often provides that all of the income and principal of the living trust can be used for the health, education, maintenance and support of the surviving spouse throughout his or her lifetime. It is possible that the trust assets could be exhausted for the benefit of the surviving spouse, leaving nothing for the children.
Example: Bill creates a living trust. He is married to Phyllis and has two children. During his lifetime, he is the primary beneficiary of the trust. After his death, Bill’s wife, Phyllis, is the primary beneficiary of the trust. She is entitled to receive the income and principal of the trust during her lifetime. After Phyllis’ death, the trust assets are divided into two equal shares—one for each child.
Beneficiaries are not restricted to family members or other individuals. Nonprofit institutions or charities can be named as beneficiaries of a trust. Beneficiaries may be given different rights in the trust property. Some beneficiaries may be income beneficiaries and may be entitled to receive only the income from the trust property. This may be interest from a savings account or bond, dividends from stock, rental income from real estate, and so on. Other beneficiaries may be principal beneficiaries and be entitled to receive the actual trust assets—for example, the money in the savings account, the stock, or rental real estate. Sometimes the beneficiary may be entitled to receive both income and principal.
The identities and rights of beneficiaries are established by the grantor when creating the living trust and can be changed during his or her lifetime.
1. Make a list of all your assets.
Be sure to include a list of your assets that includes everything you own. Assets are everything from tangible items like your house, car and jewelry to intangible ones like stocks, bonds and life insurance policies.
Having this list in front of you will give you a clearer picture of your estate and help you decide how you would like it distributed once you are gone.
2. Find the paperwork for your assets.
Just as it is important to list all of your assets and their values before writing the living trust, be sure that you have all of the paperwork—titles, deeds, stock certificates, life insurance policies, etc.—in order and ready to hand over to the attorney that will be preparing your living trust.
Having all of this ready will enable your attorney to get a running start as your assets will need to be transferred to the trust in order to “fund” it.
3. Choose beneficiaries.
You will have to name beneficiaries, those who will receive assets upon your death, so plan on who should get what before you sit down to write the living trust. Beneficiaries can include family, friends or organizations (including charities).
You may also want to consider who you don’t want to get anything at all and discuss this with the attorney as well.
Keep in mind that if you have named beneficiaries on insurance policies or retirement or savings accounts, these may conflict with your plans regarding the living trust. Be sure to let the attorney know of these potential trouble spots so as to avoid legal fights among beneficiaries after your death.
4. Choose a successor trustee.
With a living trust, you will name yourself as the trustee so you continue to have control over your assets during the course of your lifetime. Your successor trustee, though, will pay your debts and distribute your assets according to your instructions upon your death, so be sure to choose someone you trust.
Moreover, in the case of your incapacitation, your successor trustee would also be the one to handle your affairs.
5. Choose a guardian for your minor children.
Although you cannot designate a guardian for your minor children through a living trust, you should still consider who you would want to take care of them in case of your death.
You can include this information in a “pour-over will,” which also provides for the distribution of any assets acquired after the creation of the living trust but before your death or any assets inadvertently excluded.