In the past I’ve written about specific “legal words of the day” where we take a deep dive into terms that can be confusing, misleading, or unknown. A few of the favorites? Breach of contract, subpoena, and inclusion rider. But, if you’re a word nerd like me, one word or phrase per blog post is not enough! Read on for nine important words related to a key estate planning tool you should know about—trusts.
To begin, what’s a “trust” itself? No, a trust is not like “I trust you to care for my dog while I’m on summer vacation.” Think more “trust fund kid,” except know that trusts are definitely not just for the wealthy. Trusts can be key to helping you achieve your estate planning (and charitable giving) goals. At its most basic, a trust is a legal agreement between three parties: the settlor (or grantor), the trustee, and beneficiary. Let’s look at the meaning of these three parties, and then delve more into words which explain how a trust works.
All trusts have a grantor, sometimes referred to as the “settlor” or “trustor.” The grantor creates the trust and has legal authority to transfer property to the trust.
The trustee is the person who receives the property and accepts the obligation to hold the property for the benefit of the beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document and must do so in the best interests of the beneficiary. A trustee can be one, two, or many persons.
There is a specific type of trustee called the corporate trustee. Many banks, other financial institutions, and even a few law firms have trust departments to manage trusts and carry out duties of trustees. These are professional trustees (so they should be very good at their roles) and charge fees for services rendered.
The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (true also of grantor and trustee). Multiple trust beneficiaries do not have to have the same interests in the trust property. Also, trust beneficiaries do not have to even exist at the time the trust is created (such as a future grandchild, or charitable foundation that has been set up yet).
Concurrent Interests or Successive Interests
In cases of multiple beneficiaries, the beneficiaries may hold concurrent interests or successive interests. An example of concurrent interests is a group of beneficiaries identified as grandchildren of the grantors, who all receive distributions after their grandparents’ deaths. An example of successive interests is a trust in which one beneficiary has an interest for a term of years, and the other beneficiary holds a future interest, to become possessory only after the present interest terminates.
Principal, or Corpus, or Res
A trust can be either funded or unfunded. By funded, I mean that trust property has been placed “inside” the trust. This property is called the “principal,” “corpus,” or “res.” A trust is unfunded until property is transferred into the name of the trustee of the trust.
Inter Vivos Trusts and Testamentary Trusts
One common way to describe trusts is by their relationship to the life of their grantor. Those created while the grantor is alive are referred to as inter vivos trusts or living trusts. Trusts created after the grantor has died are called testamentary trusts.
A major benefit of trusts is avoiding “probate.” Probate is a court process that involves filing the will and a petition in probate court, followed by an inventory, property appraisal, totaling of owed debts and taxes, and payments of court costs and attorney’s and executor’s fees. After all of that is finished what’s left goes to the grantor’s beneficiaries. The estate of any decedent, whether s/he had a will or did not have a will, has to go through probate. A funded living trust can be a smart way to have your estate avoid the probate process. How does this work? Upon death the trustee simply distributes the assets within the trust as directed by the grantor. The caveat is that the property must be transferred to the trust.
Language lesson done for the day!
Beyond these important words, you should also know that trusts can have great utility in estate planning.
Among many other benefits, trusts have the advantages of:
- saving money, including probate costs and other taxes and fees;
- being extremely flexible;
- efficiently moving assets to your heirs and beneficiaries; and
What’s the most interesting estate planning-related word you’ve learned? Share it in the comments below!