The Language of Trusts

One of life’s little surprises comes when confronted with a trust containing language that looks like it was written in English, but is not easy to translate. Since trusts are widely used for a variety of estate planning purposes, we have prepared a simple “snip and save” primer of trust terms that should help with the translation.

First, a trust is simply a legal document that acts as a container to hold, or own, property, cash, securities, or other items of value. There are three parties to a trust: The first is the maker of the trust, called the trustor or grantor, who establishes the trust. The second is the trustee who manages and carries out the terms of the trust. Finally there is the beneficiary who receives the benefits of the trust, either in the form of income or outright distribution of property.

There are two forms of trusts, revocable and irrevocable. A revocable trust can be changed by the grantor. An irrevocable trust cannot be changed. A living trust (also known as an inter vivos trust) is considered a revocable trust since it can be changed by the grantor. A trust created by a will, known as a testamentary trust, is generally irrevocable. A living grantor may also establish an irrevocable trust by making an irrevocable decision to change title to property into the name of the trust. A typical example of such a trust would be an education trust fund set up by grandparents for a grandchild or a life insurance trust.

In a revocable trust, the grantor, the trustee, and the beneficiary may all be the same person. In most irrevocable trusts, each will be a different party.

When a grantor establishes a trust, it is funded by changing property titles to the name of the trust, which makes the property subject to the terms and control of the trust. For example, when a person establishes a living trust and changes the title of a home into the name of the trust, they have funded the trust with the retitled home. This asset now becomes part of the principal, or corpus, of the trust.

A grantor of a trust may reserve for himself powers to manage the trust as trustee, as in the case of a living trust, or he may give those powers to another person. Commonly a corporate trustee is named as the primary trustee, or standby, if the trust is expected to last many years. Banks with trust departments are most often named as a corporate trustee, since it is assumed the bank will be in existence for the life of the trust.

Beneficiaries come in several flavors as well. Typically, the income beneficiary is entitled to a defined income from the trust. In some cases this may include stipulations for distribution of principal. An example of this would be a trust established on Dad’s death that leaves property in trust for his surviving wife. The wife may be entitled to income, but may also have rights to use some of the principal for “ascertainable standards,” which might include amounts for general welfare, medical support, education, etc.

Upon the wife’s death, the husband’s trust may include language passing the remainder of the trust assets to a remainderman. The remainderman beneficiary is the ultimate trust beneficiary.

Trusts are often defined by their purpose. For example a charitable remainder or charitable lead trust is used in charitable planning. Life insurance trusts allow proceeds of large amounts of life insurance to pass, tax free, to beneficiaries. Qualified Principal Residence Trust (QPRT) can be used to pass on a family or vacation home while allowing the grantor to live in the home.

Click to learn more about Estate and Legacy Planning. Click to schedule your FREE Feliciano Financial Blueprint™ Consultation with a Certified Financial Planner™.
or call us directly. (903) 533-8585