Parties to a Trust- Part 2 of a Series
In the second article of our series on trusts, we will examine the different roles involved with a trust. In order to do this, we will work with a sample character named Gus who is working on estate planning. Gus is married to Sheila and they have two children, Dora, age 19 and Sonny, age 15. Gus and Sheila wish to pass on property to their children outside probate because they want to control how Dora and Sonny receive the property, both in timing and the purpose for the property. They wish to only allow their children to receive money from the trust at ages 25 and 30, or for college or buying a first home. Can a trust help Gus and Sheila meet these goals? Absolutely. But the roles of the trust must first be determined.
A trust will always have a grantor (aka settlor), a trustee, and a beneficiary. In addition, a trust must hold property or “res”, the Latin word for property. Let’s look each of these individually.
A grantor initiates the trust. Gus is the grantor for his trust. The importance of being the grantor lies in being able to establish the terms, or rules of the trust. In a short list, Gus, as grantor, may:
- design the trust as he wishes and may place limitations on several aspects of the trust including naming the trust itself,
- decide whether the property will be revocable,
- determine how the trustee must manage the property,
- determine how the beneficiary will receive the property,
- name who the trustee and beneficiary are,
- place any conditions on the named trustees and beneficiaries, and finally,
- declare any final terms regarding dissolution of the trust.
Once the grantor has constructed the trust to his satisfaction, the role of the grantor may be completed, unless terms of the trust allow the grantor to re-enter the scene to serve another purpose.
The trustee, as named by the grantor, is the person charged with carrying out the terms of the trust. Gus might name himself as trustee for a certain type of trust, or for another type of trust he might name his spouse, Sheila, or one of his children, Dora or Sonny. Gus might also name a corporate entity to act as trustee if he believes it appropriate.
The trustee, in nearly all respects, acts on behalf of the grantor to carry out the grantor’s wishes. If Gus names Sheila as trustee upon his death, she would ensure that the beneficiaries only get property when the trust terms allow for it. The trust might state that Dora gets her college tuition paid by the trust only. Sheila, as a dutiful trustee, would only pay Dora’s college tuition from the trust. If Dora, as beneficiary, must be on the Dean’s list with her grades before her next semester’s tuition is paid, then Sheila, as trustee, would need to check on Dora’s grades before paying more tuition for Dora.
Gus, as grantor, may have also included provisions in the trust regarding how property should be invested or as to whether the beneficiary might be limited in receiving benefits. If Gus wants trust assets invested a particular way, Sheila would follow such direction. Perhaps only a certain brokerage company should be used, or investments must follow a particular industry, or avoid certain industries. While a trustee will usually hire a money manager to assist with investments, such provisions are key to the trustee’s responsibility regarding investing trust property.
Often, the trustee will be entitled to reasonable compensation from the trust for the effort required to execute the terms of the trust. This would be especially true if a corporate trustee is employed. The trustee, especially for a corporate trustee, will likely have a written agreement with the grantor further spelling out the terms of compensation.
In addition, a trustee may also be removed or may resign if that person cannot or does not wish to continue as trustee. If Sheila, as trustee, believes her age or health limit her ability to act as trustee, she may resign and appoint a successor if the trust allows. The grantor might also name a successor trustee if the original trustee is not able or willing to serve any longer. If the trust does not allow the original trustee to name a successor or the trust does not name a successor, a court of law may need to be requested to appoint a successor trustee.
As the most active role in the operation of the trust, the trustee has significant responsibility and control. If the grantor does not oversee the trustee’s action, the trustee may be required to issue a regular report, probably annually, to the grantor or the beneficiaries detailing the trustee’s recent actions, any change in investments, and addressing any distributions from the trust.
A beneficiary is the person, or entity, who receives the property ultimately. The beneficiary has no active role in operating the trust. In many ways, the beneficiary is the most fortunate person involved with the trust for that person will fulfill the eponymous nature of the title. This person will benefit, presumably from receiving the property at some appointed time, or as the above example with the tuition payment, Dora will receive a benefit of having the trust pay her tuition for school. It sounds great, right? It is, but there can be drawbacks, too.
When stipulations are placed on the beneficiary, the trustee now is placed in a position of needing to enforce such stipulations. While Dora gets her tuition paid by the trust, the stipulation was that she needed to make the Dean’s List. If she failed to do so, the trustee was required to reject Dora’s request for another tuition payment.
If a trust has an age requirement for a beneficiary such that Dora and Sonny would not receive funds until they attained ages 25 and 30, the trustee would be obligated to manage the funds until the youngest beneficiary reached the attained age.
Some trusts may have moral clauses in them such that the beneficiary must maintain a reasonably clean lifestyle. If the beneficiary commits a felony or quits school or acts in a way that violates a term of the trust, the trustee might deny further distributions for that beneficiary. These restrictions can often cause conflict and need to be written precisely and directly to avoid confusion and faulty interpretation by the trustee and the beneficiary.
Upon distribution, the beneficiary might have tax implications. When the trustee pays Dora’s tuition, those are actually funds paid to her, or more precisely, gifted to her, and depending on the size of the gift she may have a tax obligation. Tax issues are beyond the scope of these articles on series and the author would suggest that the reader contact our office with tax questions, or obtain other competent tax and legal advice.
In any event, the beneficiary, while seemingly gaining the most of any of the players in the trust, may still have obligations to fulfill and such obligations need to be conveyed to the beneficiary under appropriate notice.
Property, or Res
The final requirement for a trust is that it must contain property to be considered a legitimate trust. If the trust has no property to manage and ultimately to distribute, there is not legal, or practical purpose for the trust.
But what type of property might the trust contain? Usually, the property will consist of financial assets such as financial investments, stocks, bonds, mutual funds, and even real estate. These would all be generally acceptable as contributions to a trust. Collectible items, such as cars, or coins of a certain vintage, or jewelry, might also be contributed to a trust. However, valuation on such items can make these types of property unwieldy to manage for the trustee and expensive due to the regular valuations that may be required.
One large asset that cannot generally be placed into a trust would be tax-qualified retirement plan assets. IRA assets cannot be transferred to a private trust because the Internal Revenue Code prohibits such contributions. An IRA must be held in its own trust or custodial account, and held by a custodian or trustee of such account. So to place an IRA in a trust, might be viewed as putting a trust into another trust, something not allowed under current tax law.
These summaries are intended to provide an overview of the parties and property that would generally be associated with a trust. No specific legal or tax advice is offered herein. If you have questions about any information in this article, please contact our office for further guidance. Thank you for your ongoing patronage and I look forward to talking with you soon.