Anatomy of a Living Trust

There is terminology used in any discussion of Trusts that you should be familiar with. The “Grantor” (sometimes called “Trustor”) is the person who transfers ownership of, or title to assets to a “Trustee”. A Trustee is an individual who holds those assets for the benefit of the “Beneficiaries”, those who will receive benefits from the Trust.

Every trust begins with a declaration of the Trust, stating that an individual or couple have decided to set up a Trust for the more efficient management of their affairs. The Grantor or Grantors are named, the initial Trustee or Trustees are named, the Trust itself is named, and all the expected Beneficiaries of the Trust are identified.

Initially, the Grantors are also the Trustees and also the Beneficiaries; they have created this Trust, they own the property as Trustees, and as Trustees, retain complete control over the assets put into the Trust. The Grantors, of course, as Beneficiaries of the Trust, receive all the income and rights to use the property conveyed to the Trust. As a result, there is no income tax effect to Living Trusts.

The Trustees can take and return any trust asset while both Grantors are still alive, to the Grantors (themselves). For example, if the Grantors are refinancing a principal residence, the mortgage company will require the property be removed from the Trust. After the loan documents are recorded, the Grantors will put the property back into the trust.

The powers of Trustees are quite broad. Basically, they can do anything with the Trust property that the Grantors could have done before there was a Trust.

The document includes provisions for co-Trustees to help the Grantors when they want to do less managing of their financial affairs, and successor Trustees after the Grantor or Grantors have died. There are always special limitations built into Trusts, to protect the heirs from themselves, called “spendthrift” provisions. These prevent most creditors from seizing the heirs’ share of the trust estate. There can be provisions for trustee compensation.

If the Trust is that of a single person, his or her death triggers the trust administration process. Briefly, it involves locating all trust assets and debts, settling up with the various government agencies such as the IRS or Medi-Cal, paying the debts and distributing the remainder to the beneficiaries. Only without court supervision. But always with the advice of a lawyer, as mistakes in this area are very costly.

If there is a couple, there may be adjustments in the trust structure to minimize estate taxes. Some of the distribution scheme may no longer be able to be changed. For example, if Wife dies, Husband can’t remarry and disinherit all of Wife’s children.

Lastly, the document includes a place for Grantors to make a record of the property conveyed to the Trust, and to update the contact information of the Trustees and Beneficiaries.

There is terminology used in the discussion of trusts which you should be familiar with. The “Grantor” (sometimes called “Trustor”) is the person who conveys (transfers ownership of or title to)
assets (Corpus) to a “Trustee”. A Trustee is an individual who holds those assets for the benefit of the “Beneficiaries”, those who will receive benefits from the trust.

Every trust document begins with a declaration of the trust stating that an individual or couple have decided to set up a trust for more efficient management of their affairs. The Grantor or Grantors are named, the initial Trustee or Trustees are named, the trust itself is named, and all the expected Beneficiaries of the trust are identified.

Initially, the Grantors are also the Trustees and also the Beneficiaries; they have created this Trust, they own the property as Trustees, and as Trustees, retain complete control over the assets put into the trust. The Grantors, of course, as Beneficiaries of the trust, receive all the income and rights to use the property conveyed to the Trust. As a result, there is no income tax effect to Living Trusts.

The Trustees can take the property of the trust and give it back to the Grantors (themselves). For example, if the Grantors are refinancing a principal residence, the mortgage company will require the property be removed from the Trust. After the loan documents are recorded, the Grantors put the property back into the Trust. The powers of Trustees are quite broad. Basically, they can do anything with the Trust property that the Grantors could have done before there was a Trust.

The document includes provisions for co-Trustees to help the Grantors when they want to do less managing of their financial affairs, and successor Trustees, after the Grantor or Grantors have died. Of course, the Trustees’ powers are more limited after the death of one or both of the original Grantors. There are always special limitations built into Trusts, to protect the heirs from themselves, called “spendthrift” provisions. These prevent most creditors from seizing the heirs’ share of the Trust Estate. There can be provisions for Trustee compensation.

If the Trust is that of a single person, his or her death triggers the trust administration process. Briefly, it involves locating all trust assets and debts, settling up with the various government agencies such as the IRS or Medi-Cal, paying the debts and distributing the remainder to the Beneficiaries, without court supervision. The advice of a lawyer is essential, as mistakes in this area are very costly.

If there is a couple, there may be adjustments in the trust structure to minimize estate taxes. Some of the distribution scheme may no longer be able to be changed. For example, if Wife dies, Husband can’t remarry and disinherit all of Wife’s children.

Lastly, the document includes a place for Grantors to make a record of the property conveyed to the Trust, and to update the contact information of the Trustees and Beneficiaries.


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