Trustors, trustees and beneficiaries- a trust’s key players

One of the most important decisions a client can make when creating an estate plan, is who plays what role. When creating a trust, there are 3 (or sometimes 4) key players: the trustor, the trustee, the beneficiary and, sometimes a trust protector. It can be pretty difficult to pick who in your life should play what role until you know what each role does. So, what do each of these roles do?

Trustor:

Trustor is the easiest person to pick, because most of the time, you don’t have to pick at all. A trustor (sometimes called a grantor or settlor) the person (or people) who create the trust. When we meet with a client to prepare a trust, almost always, the client is the Trustor. Trusts can have multiple trustors. For example, if a married couple creates a joint revocable trust, they are both the trustors.

As the creators of the trust, Trustors set the trust terms, including the provisions that say how distributions are made. Trustors also often have special powers outlined in the trust. For example a trustor might have the ability to amend or revoke the trust. But, this is not always the case.

Trustors are also often the people who fund the trust, meaning they put their own assets into the trust. Once again, this is not always the case. A parent may set up a stand alone Special Needs Trust for a disabled child that is later funded by an inheritance from a grandparent. In that situation the parent would be the Trustor, even though the grandparent funded the trust.

Trustee:

A trustee is the person (or people or institution) who manages the assets in the trust for the benefit of a beneficiary. Trustees owe a fiduciary duty to the beneficiaries of the trust, which include duties of loyalty and a duty to inform and report to beneficiaries. Trustees are required to follow to the terms of the trust in good faith, but are often given some discretion in the terms set by Trustors.

The Trustor picks who serves as trustee, at least initially, and can pick themselves. It is common in revocable living trusts, for a Trustor to create a trust and then make themselves the initial trustee. That way, when they transfer their assets into the trust, they maintain control over those assets during their lifetime. Then, when the Trustor dies or becomes incapacitated, the Successor Trustee, if one is named, takes over as Trustee. Trustor’s can also pick multiple trustees to act at together or independently of one another (a/k/a co-trustees).

Most trusts give trustees broad powers. Because trustees generally have broad powers and have the important role of managing the trusts funds, it is important that you choose someone you trust to play this role. In fact it’s so important, that we’ve written several newsletters about it that you can read here, here, here and here. The overarching themes are to pick someone reliable, organized, trustworthy and at least somewhat financially literate. If you can’t think of a loved one or friend, consider a corporate fiduciary.

Beneficiary:

A beneficiary is a person or group of people who stand to benefit from a trust. Arizona Law defines a beneficiary as a person who either “has a present or future interest in a trust, vested or contingent” or “In a capacity other than trustee, holds a power of appointment over trust property.”

There are a couple of different types of beneficiaries. Qualified beneficiaries are beneficiaries who on the date of the beneficiary’s qualification are currently distributees or permissible distributees of trust income or principal and those who would be if the trust terminated. A primary beneficiary is the first in line to receive the benefits of the trust. A contingent beneficiary is a beneficiary who only receives money if someone else is unable to claim their interest or disclaims their interest. For example, let’s say a trust says “Distribute the trust estate to Paula. If Paula is not then surviving, then to Carrie.” Paula is the primary beneficiary because she is the first in line to receive the distribution. Carrie is a contingent beneficiary, because she only gets the distribution if Paula dies.

Something to note is that beneficiaries are different than heirs. Heirs refer to the people who are entitled under the intestate succession statute to the property of the decedent. A beneficiary is who has an interest in the trust estate. Your beneficiaries might be the same people as your heirs, but they also might not be and the words are not interchangeable.

Trust Protector:

You may have noticed that I was hesitant to include trust protectors as one of the key players in a trust. This is because not every trust has one. In fact, many don’t. And, not every trust needs one. But, trust protectors are growing in popularity, and they can make a world of difference in some situations.

A trust protector is someone who can help the other players work together smoothly and protect the Trustor’s wishes. The trust document itself governs what a trust protector can or cannot do. But Arizona law offers some suggestions for what role a trust protector might play. Their list includes giving them the power to remove and appoint a trustee, modify and amend the trust instrument for a valid purpose, increase or decrease the interests of beneficiaries and modify powers of appointment. These are just suggestions though. The scope can be modified to meet your needs. Trust protectors are not fiduciaries under Arizona law. This means they are not held to the same standards as the trustee and do not have to act in the best interest of the beneficiaries when carrying out your goals.

Why would you want someone to have those powers? Well, the role is usually designed to safeguard the trust’s overall purpose after the trustor dies or has otherwise given up control of the trust. Trust administrations can run into difficulty if, for instance, the terms become outdated, the trustee fails to act in accordance with the terms, or if beneficiaries disagree with how the trustee is doing the job. A trust protector allows another person to watch out for potential problems and help get them resolved.

What now?

Now you know what each role does in your trust. Now, take a look at your estate plan with these roles in mind. See if you are still happy with the choices you made. Has the person you named as trustee really organized enough to serve? Is your trust protector the right person to see that your goals for your trust are carried out? Shoudl your grandchildren really only be contingent beneficiaries, or do you want to make sure they get an inheritance when you die? Remember, it is important that all of these players are able to get along well enough to administer your trust. If you are unsure about the people you chose for these roles, it might not be too late. Schedule an appointment with your estate planning attorney.