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Settlor of a Trust – Definition and Explanation

The Settlor of a Trust – What Does That Mean?

Settlor of a TrustThe settlor of a trust is the person who creates a trust to be managed by a trustee for the benefit of another party called the beneficiary.  The settlor of a trust plans, creates, and funds the trust. Without the settlor, the trust would simply not exist.

A settlor of a trust is the person that establishes the trust. The settlor can go by several other names including donor, grantor, and trustor. Regardless of what this person is called, his or her role is to legally establish the trust and transfer control of an asset to a trustee.  The trustee then manages the assets in the trust for one or more beneficiaries.

In certain types of trusts, the settlor may also be the beneficiary, the trustee, or both.  The key players in a trust are as follows:

Parties to a trust

  • Settlor – A settlor is a person who establishes the trust and transfers property to the trustee.  The trustee then administers and disposes of such property (trust property) on behalf of the beneficiaries.  The trustee acts in accordance with the trust objectives.
  • Trustee – A trustee is someone who receives trust property from the settlor.  The trustee is responsible for administering and disposing of the trust property on behalf of the beneficiaries.  This is done in accordance with the trust goals.
  • Beneficiary – refers to the individual or entity who receives the trustee’s distribution of trust income in accordance with the conditions of the trust. The beneficiary can be the same person as the settlor or someone else. The recipient does not even have to be a living individual. In such instances, a caretaker is appointed to safeguard the beneficiary’s benefits. In general, the beneficiary may not change during the duration of the trust.  However, exceptions can occur if the terms of the trust indicate otherwise.

The Settlor of a Trust – Revocable

Revocable trusts are the most common example of the settlor having several functions. A revocable trust is sometimes known as a living trust.  Revocable trusts often involve the settlor functioning as trustee as well as remaining one of the trust’s major beneficiaries. The settlor of a revocable trust typically retains the authority to amend any of the trust’s provisions at any time.  This includes the ability to terminate the trust and reclaim all of its property.

The settlor retains extensive control in a normal revocable trust.  However, the trust agreement will clearly indicate the constraints on that power. For example, if the settlor becomes unable to manage his or her own financial affairs, a successor trustee might take over the trust in accordance with its conditions. Often, the trust document will include clauses stating the conditions under which power can be transferred to a successor trustee.

The Settlor of a Trust – Irrevocable

The circumstances are very different for the settlor in the case of an irrevocable trust. Most of the time, a settlor will create an irrevocable trust for the benefit of someone else. In that instance, the trustee must abide by the conditions of the trust document.  Further, the settlor no longer has the authority to amend the trust after its formation. In practice, however, the settlor frequently wields significant power over the activities of an irrevocable trust. Those participating in the trust’s ongoing management often desire to uphold the settlor’s wishes.  Therefore, the settlor’s views on some topics will continue to have weight.

The term settlor is legal jargon, but the concept is straightforward. The settlor is the person who takes the necessary action to make the estate and create the trust.  In other words, the settlor plans, creates, and funds a trust. Without the settlor, the trust would simply not exist. (Source: fool.com)

What is a Trust

Trusts are created to hold money, investments, or property for a variety of reasons. Trusts of various types protect assets in various ways. They can help ensure that assets are transferred smoothly and quickly after death.  Further, they can prevent probate fees, reduce estate taxes, and ensure that the settlor’s assets are used as intended. A trust, for example, can allow a parent to ensure that a child does not squander an inheritance. Trusts also allow the settlor to decide what will happen to their assets in the case of mental handicap or incapacity.  They can do this while they are still fully mentally capable.

Setting up a simple trust can be low-cost.  The settlor can complete the process with self-help legal paperwork.  On the other hand, it can be a more complicated process that requires an attorney and cost thousands of dollars. Also, if a bank or trust business is designated as a trustee, there will be administrative charges to keep the trust running.

The settlor of a Trust – Living Trust Example

For example, consider a revocable living trust to see how the settlor’s function works. Mr. J.P. Getty, the settlor, creates the trust. He does this rather than making a will to govern what happens to his possessions once he dies. When J.P. dies, his assets will not have to go through probate.  Also, because the process of distributing trust assets does not involve the courts, his assets will not become a public record.

Once established, J.P. transfers all of his assets into the trust.  This includes his home, lake house, several family treasures, and many investment accounts.  He retitles them and puts them in the trust’s name. J.P. then selects a trusted company as the trustee to act as the company in charge of managing and distributing the trust funds. His two children will be the trust’s beneficiaries following his death.  However, J.P. will be the beneficiary while he is still living, despite the fact that he is also the settlor. Mr. Getty can make adjustments to his living trust as long as he is alive because he has chosen a revocable living trust. For example, if one of his children engages in criminal activities, J.P. can remove him as a beneficiary.  This will prevent the child from using the assets to defend or pursue his criminal activities.

Why Establish a Trust?

A trust is traditionally used to minimize estate taxes.  However, it and can offer other benefits as part of a well-crafted estate plan. A trust is a fiduciary arrangement in which a third party, or trustee, holds assets on behalf of a beneficiary or beneficiaries. Trusts can be set up in a variety of ways and can define how and when assets pass to beneficiaries. Trusts typically skip probate.  Therefore, beneficiaries may have access to these assets sooner than they would to assets passed through a will. Furthermore, if it is an irrevocable trust, it may not be deemed part of your taxable estate.  This results in lower taxes due upon your death. Assets in a trust are typically allowed to pass outside of probate.  This saves time and court fees, as well as potentially lowering estate taxes. Trusts have the following advantages:

  • Control your wealth. A trust’s terms can be precisely defined.  This allows you to manage when and to whom distributions are made. You can also set up a revocable trust.  Properly structured, the trust assets remain available to you throughout your lifetime.  Still, you can designate to whom the remaining assets will pass after your death.  Even if the situation is complex, such as children from many marriages.
  • Protect your legacy. A properly constructed trust can help protect your estate and legacy.  For example, from your heirs’ creditors or from underage beneficiaries who may not be adept at money management.
  • Preserve your privacy. Probate is a matter of public record.  However, a trust may allow assets to pass outside of probate and remain private.  This is in addition to possibly reducing the amount lost to court fees and taxes in the process. (Source: fidelity.com)

Frequently Asked Questions

Who can be a settlor of a trust?

In general, anyone 18 years of age or older who is of sound mind has the legal competence to establish a lawful trust.  Ultimately, it comes down to the specific laws and statutes of the state in which you reside.

What is a settlor of a trust deed?

A trust deed is a legal document that describes the terms and circumstances of the trust and lists the people involved. The settlor is simply the trust’s originator.

What is a settlor of a living trust?

One of the most frequent types of trusts used in estate planning is a revocable living trust.  The terminology used to define trust parties is the same. As a result, the creator of a living trust is still considered as the settlor.

Can a settlor be a trustee?

Yes, a trust’s settlor can also be a trustee. A trust can also include more than one settlor and trustee. This is a common arrangement.  For example, when a married couple establishes a joint trust together.

Can a settlor be a beneficiary?

A settlor can be a beneficiary of a trust.  However, he or she cannot be the sole beneficiary.  Otherwise, there would be no reason to have the trust in the first place. Remember that the primary reason for establishing a trust is to hold assets for the benefit of a third party.  Therefore, having a trust makes little sense if there is no other party.

What is a successor trustee?

If the primary trustee dies, becomes incapacitated, or is otherwise unable or unwilling to serve as trustee, a replacement trustee takes over. In most revocable living trusts, trustors name a primary and replacement trustee. If the named trustee is unable to carry out their responsibilities, the local probate court may appoint a responsible individual.  For example, a professional fiduciary, as successor. In other situations, the trustee role may revert to the attorney who handled the legal aspects of initially setting up the trust.

What is an administrator of trust?

The trustee is the trust’s administrator. As such, he or she is in charge of managing a trust. The trust administrator is frequently a fiduciary.  This could be a trusted attorney, qualified accountant, or professional fiduciary. The benefits of naming a trust administrator include any financial or estate tax experience they may have. For example, consider a large estate’s trust that includes numerous businesses, real estate properties, and complex assets.  It may be advantageous to appoint a qualified fiduciary.  Someone with experience in business and tax law to assist in effectively transferring inheritance assets from the trust to beneficiaries while avoiding unnecessary estate taxes and fees.

(Sources: legalzoom.com & rmolawyers.com)

Up Next: What are Cyclical Stocks?

Cyclical StocksCyclical stocks tend to closely follow the overall economy, rising swiftly during economic expansions and falling sharply during recessions.

Cyclical stocks have a business cycle that is influenced by macroeconomic or systematic fluctuations in the overall economy. These equities are noted for tracking an economy’s expansion, peak, recession, and recovery. The majority of cyclical equities involve companies that sell consumer discretionary items.  Customers buy more discretionary items during a boom but spend less on them during a downturn.

Automobile manufacturers, airlines, furniture retailers, clothes stores, hotels, and restaurants are examples of companies with cyclical stocks. People can afford to buy new automobiles, upgrade their homes, shop, and vacation while the economy is doing well. When the economy is doing poorly, these are some of the first things consumers reduce. If a recession is severe enough, cyclical stocks can become nearly worthless and businesses can go bankrupt.

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