If you are considering setting up a living trust, you need to understand the difference between a trustor and a trustee, as well as the relationship between them. Although one person can be both trustor and trustee, or both trustee and beneficiary, the roles of the trustor, trustee, and beneficiary are distinctly different. Each comes with its own rights and responsibilities.
Living trust basics
A living trust is a legal tool for the management of one's assets both during a person's lifetime and upon death. Although primarily used to avoid probate and minimize or delay taxes, a living trust may also be used to qualify for Medicaid payment of long-term health care if it is made irrevocable.
A trust is an entity that is separate from the trustor, or creator of the trust. The trust holds title to property, has its own federal tax identification number, and files separate tax returns.
A trust involves three classifications of parties:
- Trustor: a person who establishes a trust, typically either an individual person or a married couple. A trustor may also be called a grantor or a settlor.
- Trustee: a person or persons designated by a trust document to hold and manage the property in the trust.
- Beneficiary: a person or entity for whom the trust was established, most often the trustor, a child or other relative of the trustor, or a charitable organization. There can be, and often is, more than one beneficiary.
In a trust, the trustor transfers property to the trust, to be held and managed by the trustee for the benefit of the beneficiaries. The trust agreement establishes the guidelines the trustee is to apply in managing the trust assets.
Designating a trustee
A trustee can be an individual, two or more individuals, or a business entity such as a corporation. A business entity serving as trustee is typically a bank, law firm, or other professional trustee company.
The trustor can also be the initial trustee. If this is done, the trust needs to designate a successor trustee who will step into that role upon the death or incapacity of the trustor.
Beneficiaries may also be designated as trustees. Many parents designate their children as both beneficiaries and as successor co-trustees. However, this has the potential to create conflict between the children if they disagree about how the trust assets are managed.
In choosing a trustee, it is important to select one who can be trusted to follow your wishes as expressed in the trust agreement, who can be trusted to act in the best interests of the beneficiaries, and who has the ability and knowledge to manage the trust assets.
The role of a trustee
The duties of a trustee are to follow the terms of the trust document and to act in the best interests of beneficiaries in following those terms, a responsibility known as fiduciary duty. Most trusts provide that trust income and assets are to be used for the benefit of the trustor during the trustor's lifetime. Upon the trustor's passing, the trust either continues for the benefit of the beneficiaries or ends, in which case the remaining assets are distributed to the beneficiaries.
In order to achieve the desired tax deferral benefits, it is common for the trust to continue beyond the trustor's death, to the benefit of the trustor's children and their descendants. Therefore, the trustee's role is likely to continue for some time after the passing of the trustor.
When creating a living trust, you need to consider your particular situation as it relates to tax laws and possibly to long-term care planning. You can use a DIY legal service to receive assistance determining how a living trust can be part of your estate plan.