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Settlor: Roles, Types, And Powers

Last updated 03/19/2024 by

Dan Agbo

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Fact checked by

A settlor, also known as a donor, grantor, trustor, or trustmaker, is the individual or entity that establishes a trust. This article explores the role of the settlor in detail, including their responsibilities, the types of trusts they can create, and the benefits of setting up a trust. Whether you’re interested in estate planning or protecting your assets, understanding the settlor’s role is essential.

What is a settlor?

A settlor, sometimes referred to as a donor, grantor, trustor, or trustmaker, is the individual or entity that creates a trust. The settlor’s primary responsibility is to legally transfer control of an asset to a trustee for the benefit of one or more beneficiaries.

Key points:

  • The settlor is the entity that establishes a trust.
  • Trusts can go by various names, but the settlor’s role remains the same.
  • The trustee manages the assets in the trust on behalf of the beneficiaries.
Settlors play a pivotal role in the world of trusts, as they set the wheels in motion for asset management and distribution. Whether you’re an individual considering setting up a trust or simply curious about the mechanics behind this financial instrument, understanding the essence of a settlor is fundamental. Here are the key aspects to consider:

Types of trusts

Trusts come in various forms, each serving different purposes. Some common types of trusts include:

1. Testamentary trust

A testamentary trust is created through a person’s will and manages assets based on the will’s instructions. It comes into effect upon the person’s passing, ensuring that their wishes regarding asset distribution are met.

2. Living (Inter Vivos) trust

A living trust is established during an individual’s lifetime and bypasses probate, making it a popular choice for estate planning. This type of trust allows for a seamless transfer of assets, avoiding the complexities of the probate process.

3. Revocable trust

A revocable trust offers flexibility to the settlor. It allows changes to the trust as long as the settlor is alive. This adaptability makes it an excellent choice for those who want to retain control over their assets and adapt to changing circumstances.

4. Irrevocable trust

An irrevocable trust, once established, typically cannot be altered. This provides a high level of asset protection and estate tax benefits. It’s a strategic choice for those looking to safeguard assets and minimize tax liabilities.

5. More trust variations

There are numerous other trust variations, each with unique features and benefits. Settlors can choose the type that best suits their needs and objectives. Whether it’s a charitable trust, discretionary trust, or family trust, the settlor’s decision should align with their financial goals and long-term plans.

Powers of a settlor

Settlors possess certain powers and rights when establishing a trust. These powers enable them to shape the trust’s terms, conditions, and management. Understanding the extent of a settlor’s authority is crucial for anyone considering the creation of a trust. Here are the key powers a settlor typically holds:

1. Determining trust terms

One of the fundamental powers of a settlor is the ability to establish the terms and conditions of the trust. This includes defining the trust’s purpose, specifying the beneficiaries, and outlining the assets included in the trust. The settlor can be as specific or as broad as they desire in these terms.

2. Selecting the trustee

The settlor has the authority to appoint the trustee who will manage and oversee the trust. This is a critical decision as the trustee plays a key role in administering the trust and ensuring the settlor’s intentions are carried out. The settlor can choose an individual, a corporate trustee, or even themselves, depending on the type of trust.

3. Modifying the trust (if revocable)

If the settlor has established a revocable trust, they retain the power to make changes to the trust during their lifetime. This includes amending the trust’s terms, adding or removing beneficiaries, or altering the assets held in the trust. The flexibility of a revocable trust allows the settlor to adapt to changing circumstances.

4. Revoking the trust (if revocable)

In the case of a revocable trust, the settlor has the power to revoke or dissolve the trust entirely. This means they can reclaim the trust assets and terminate the trust agreement. It’s a valuable option for individuals who want to maintain full control over their assets and have the ability to undo the trust if needed.

5. Directing asset distribution

Settlors can specify how and when the trust assets should be distributed to the beneficiaries. This might include conditions, such as age milestones or specific life events, that must be met before beneficiaries can access their share of the trust assets. The settlor’s directions provide a clear roadmap for the trustee.

6. Adding or removing beneficiaries

If the settlor’s circumstances change or if they wish to include or exclude specific individuals as beneficiaries, they have the power to do so. This flexibility ensures that the trust aligns with the settlor’s evolving intentions and family dynamics.

7. Providing investment guidelines

Settlors can establish guidelines for how the trustee should manage and invest the trust assets. This can include specifying investment goals, risk tolerance, and ethical considerations. The settlor’s directives help ensure that the assets are managed in alignment with their financial objectives.
It’s important to note that while settlors have significant powers, they also have a fiduciary duty to act in the best interests of the trust and its beneficiaries. This means that the exercise of these powers should be done with prudence and in accordance with the trust’s stated objectives.
Understanding the extent of these powers is essential for anyone considering the establishment of a trust, as it empowers them to make informed decisions about the trust’s structure and management.

The bottom line

In conclusion, the role of a settlor in establishing trusts is paramount to the effective management and distribution of assets. Settlors, whether individuals or entities, have the power to shape the financial future of beneficiaries. With various types of trusts available, they can tailor their choice to meet specific objectives, from minimizing estate taxes to protecting assets. Understanding the significance of the settlor’s role empowers individuals to make informed decisions about their financial future and legacy.
Here is a list of the benefits and drawbacks to consider when being a settlor.
  • Control over asset distribution.
  • Asset protection and minimization of estate taxes.
  • Smooth and speedy transfer of assets upon death.
  • Potential administrative and legal complexities.
  • Costs associated with setting up and maintaining a trust.
  • Irrevocable trusts may limit control.

Frequently asked questions

What is the role of a settlor in a trust?

The settlor is the entity that establishes the trust and transfers assets to a trustee for the benefit of beneficiaries. They set the terms and objectives of the trust.

Can a settlor also be a beneficiary of the trust?

Yes, in certain types of trusts, the settlor can be both the creator of the trust and one of its beneficiaries.

How does a trust help in estate planning?

Trusts allow for the smooth transfer of assets upon death, reducing probate costs and estate taxes. They ensure that the settlor’s assets are used as intended.

What’s the difference between a revocable and an irrevocable trust?

A revocable trust can be modified or revoked by the settlor during their lifetime, while an irrevocable trust typically cannot be altered once established.

What is the cost of setting up and maintaining a trust?

The cost of establishing a trust can range from using self-help legal forms (inexpensive) to hiring an attorney (more expensive). Additionally, administrative costs may apply if a bank or trust company is the trustee.

Key takeaways

  • A settlor establishes a trust and transfers assets to a trustee for beneficiaries.
  • Trusts come in various types, each with unique benefits and purposes.
  • Being a settlor has both pros and cons, including control over asset distribution and potential costs.
  • Settlors can also be beneficiaries of the trust, depending on the trust type.
  • Trusts play a crucial role in estate planning, offering asset protection and tax advantages.

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