Trustors Explained: What They Are, How They Work, and Real-Life Examples
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Summary:
Trustors, also known as grantors or settlors, play a crucial role in estate planning by creating trusts to safeguard and distribute assets. This article explains the role of a trustor, their responsibilities, the types of trusts they can establish, and the importance of the fiduciary duty. Additionally, it covers real-life examples of trustors. Read on to gain a comprehensive understanding of trustors and their vital role in financial planning.
What is a trustor?
In the realm of personal finance and estate planning, the term “trustor” refers to an entity that establishes and opens up a trust. Trustors can be individuals, married couples, or even organizations. They often make contributions of property, including money, gifts, and assets, to add to the trust. The creation of trusts is a pivotal component of estate planning, as trustors transfer their fiduciary duty to a third-party trustee, who manages the assets within the trust for the benefit of designated beneficiaries.
Understanding trustors
Estate planning is a vital financial service that enables individuals and organizations to preserve, manage, and distribute their assets in the event of illness and/or death. Typical assets included in estate planning encompass money, properties, vehicles, investments, personal belongings such as artwork and jewelry, life insurance policies, and debt.
The entity responsible for establishing a trust is referred to as the trustor. This individual may also be known as the grantor or settlor and plays a pivotal role in estate planning by transferring the fiduciary duty to another individual or entity, often known as the trustee. The trustor and trustee collaborate to define the structure and particulars of the trust.
Trusts are legal entities specifically designed to hold and protect the assets of the trustor. They offer a crucial form of legal protection for assets that the trustor wishes to allocate to their heirs or other entities. Trustors have the flexibility to create different types of trusts to suit their specific needs, including testamentary trusts, living trusts, blind trusts, and charitable trusts.
Types of trusts
Trustors may set up various types of trusts, each serving distinct purposes:
- Testamentary trusts: These trusts are established through the trustor’s last will and testament and take effect upon their passing.
- Living trusts: These are set up while the trustor is still alive, granting the trustee authority to manage assets for the beneficiaries during and after the trustor’s lifetime.
- Blind trusts: These are established without the beneficiaries’ knowledge of the trust’s specifics, providing an additional layer of confidentiality.
- Charitable trusts: Created while the trustor is alive, these trusts have the express purpose of distributing assets to charitable organizations upon the trustor’s death.
Trustors have various motivations for establishing trusts, including tax reduction, favorable tax treatment upon death, asset protection, ensuring the financial stability of young children, capital gains deductions, and facilitating the transfer of wealth among family members.
Special considerations
The concept of fiduciary duty is central to the relationship between the trustor and the trustee. When trustors entrust their assets to a trustee, they transfer the responsibility for managing these assets. Fiduciaries are legally mandated to hold assets in trust for another person and are obligated to manage these assets for the benefit of the other person, rather than for their own financial gain.
As a result, it is imperative that trustees, pension administrators, custodians, and investment advisers act ethically and avoid any fraudulent or manipulative behavior when working with beneficiaries.
When things go awry
While trusts are typically established to benefit heirs and other designated parties, these relationships can sometimes encounter challenges, leading to legal and ethical dilemmas. An illustrative case is the 2010 lawsuit involving the Rollins family trust, associated with the founding family of the pest control company, Rollins Inc.
The trustor, O. Wayne Rollins, passed away in 1991, and his nine grandchildren engaged in a nearly decade-long legal battle with their father and uncle—both trustees. The grandchildren alleged that their father and uncle violated trust documents, consolidating power in their favor instead of acting as fiduciaries and equitably distributing the family’s wealth. Eventually, the parties reached a confidential settlement in 2019.
Trust situations can become more complex than intended in various ways. Investments within a trust may underperform, leaving beneficiaries with fewer assets than expected. Additionally, trustors may have a change of heart regarding trust distribution or asset management, particularly in the case of revocable trusts. Making amendments to irrevocable trusts is often exceedingly difficult, even when trustors regret their decisions.
Example of a trustor
For a practical example, we can turn to the public Securities and Exchange Commission (SEC) Form 3 filed on April 26, 2018. This document details the statement of ownership of securities by Bradley Scott Smith, the Chief Information Officer (CIO) of Paycom Software.
The form indicates that Smith holds his securities within the Bradley Scott Smith Revocable Trust as of October 30, 2017. This trust benefits Mr. Smith, his spouse, and his children. Therefore, Bradley Scott Smith is the trustor of the account, and his spouse serves as a co-trustee.
Frequently asked questions
What is the primary responsibility of a trustor?
A trustor’s primary responsibility is to establish and open a trust, transferring their fiduciary duty to a trustee who manages the trust’s assets for the benefit of designated beneficiaries.
Can trustors be organizations, or are they limited to individuals and couples?
Trustors can be individuals, married couples, or organizations, making it a flexible concept in estate planning.
What types of assets are typically included in estate planning?
Estate planning often involves assets such as money, properties, vehicles, investments, personal belongings, life insurance policies, and debt.
Are there any restrictions on the number of trusts a trustor can establish?
Trustors have the freedom to create various types of trusts, each serving specific purposes, including testamentary trusts, living trusts, blind trusts, and charitable trusts.
What is the significance of the fiduciary duty in the trustor-trustee relationship?
The fiduciary duty is vital, as it mandates trustees to manage assets in the trust for the benefit of beneficiaries rather than for their own gain, ensuring ethical and responsible asset management.
Key takeaways
- A trustor, also known as a grantor or settlor, is a key entity in estate planning, responsible for creating and opening trusts to safeguard and distribute assets.
- Trustors can be individuals, married couples, or organizations, offering flexibility in the estate planning process.
- The fiduciary duty plays a central role in the trustor-trustee relationship, mandating trustees to manage assets for the benefit of beneficiaries, ensuring ethical and responsible asset management.
- Trustors have the option to establish various trust types, each serving distinct purposes, such as testamentary trusts, living trusts, blind trusts, and charitable trusts.
- Challenges may arise in trust situations, and trustors may find it difficult to amend irrevocable trusts, emphasizing the importance of careful planning and understanding.
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