Who are the parties to a trust?

A trust is a legally created entity designed for the protection, growth, and distribution of assets. There are three different roles in a trust, with nearly endless combinations of trust parties. A trust can be created by one person or many, it can be run by anyone the founders choose, and it can benefit a specific person or group of people. Each role in a trust comes with different responsibilities and expectations that must be followed in order for the trust to succeed.

Trust Parties: The Settlor

A trust begins with the owner of the property and assets. This person is known as the settlor. The settlor begins a trust with the intent of holding property and assets for the benefit of someone else. The settlor can place any asset into the trust including real estate, vehicles, investments, savings accounts, and even antique items and art. Depending on the type of trust that the settlor creates, he or she will owe a certain amount of gift tax for transferring the assets into the trust.

The settlor also has the responsibility of determining who will benefit from the assets. Under current law, it is vital that the settlor choose a specifically mentioned person or group of people. While most trusts are designed for the benefit of a settlor’s heirs, the settlor can also name a specific church or charity to benefit from the trust. Once the gift tax is paid and the trust papers filed, the trust is considered active and the settlor’s role is for the most part complete.

Trust Parties: The Trustee

Once the trust is established, the trustee takes over the care of the trust. The trustee is a person specifically named by the settlor to care for and expand the assets of the trust. The trustee has the right to do whatever is necessary with the assets to grow the trust. For example, trustees may rent out real estate in order for the property to bring in income. If there are antiques or artwork in the trust, the trustee may loan the pieces out to a museum for a specific amount. Trustees can also choose how to invest any money that is in the trust by forming a portfolio.

The trustee must act prudently with the trust funds. If the trustee does not act prudently and money is lost, it is the trustee who must pay the trust back. Depending on who the trustee is and how much time and effort the trustee spends on the trust, he or she may be compensated for his or her time out of the trust’s funds. The trustee remains in charge of the trust until the trust’s funds are exhausted, the trustee is removed, or the trustee dies.

Case Studies: Trust Parties and Their Roles

Case Study 1: The Settlor’s Intent

John Smith establishes a trust with the intention of holding his real estate, investments, and savings accounts for the benefit of his children. He carefully selects specific beneficiaries, his children, to receive the assets. John pays the necessary gift tax for transferring the assets into the trust and files the required trust papers. Once the trust is active, John’s role as the settlor is mostly complete.

Case Study 2: The Trustee’s Responsibilities

Mary Johnson is named as the trustee in this case. She takes over the care of the trust, with the responsibility to expand and manage the assets. Mary rents out the trust’s real estate to generate income and loans the valuable artwork to a museum for exhibition.

She also creates an investment portfolio to grow the trust’s funds. Mary must act prudently, as any losses incurred due to her actions would need to be reimbursed from the trust. Depending on her involvement and effort, Mary may be compensated from the trust’s funds. She remains the trustee until the trust’s funds are exhausted, she is removed, or she passes away.

Case Study 3: The Role of Beneficiaries

The beneficiaries are John Smith’s children. They receive payments from the trust and are responsible for making any necessary tax adjustments. Additionally, the beneficiaries have the duty to audit the trust annually, ensuring that the trustee, Mary Johnson, is managing the funds responsibly.

If Mary fails to meet her obligations or mishandles the funds, the beneficiaries have the authority to remove her and appoint a new trustee.

Trust Parties: The Beneficiaries

The final parties to a trust are the ones receiving the benefit of the trust. These people are known as beneficiaries. The beneficiaries of the trust have two roles. First, they receive payments from the trust and make necessary tax adjustments resulting from the payments. Second, the beneficiaries audit the trust annually to verify that the trustee is being responsible with the funds. If the trustee is spending the funds inappropriately, or improperly investing the funds, then the beneficiaries are responsible for removing the trustee and replacing that trustee with another who will run the trust properly.