A trust is created by the grantor (that’s you). The grantor writes the rules governing how the trust is to operate, what it is to do, and how and when to do it. If the trust is revocable, you can change the rules at any time. If the trust is irrevocable, you can’t. (Each form has advantages and disadvantages, including tax implications.)
Trustee
When creating the trust, you appoint a trustee, who will have the job of managing the trust and its assets. (People often appoint themselves to serve as trustee.) The trustee must follow the trust’s rules, although, some trusts let the trustee use discretion in certain matters.
Donor
After you create the trust, it receives gifts from a donor (that’s also usually you, although you might permit your trust to receive gifts from others in addition to you or instead of you). The trustee collects the gifts and invests the money in accordance with the rules of the trust. As a result, the trust will find itself with three things: principal (the money it was given, also called the corpus), interest and dividends earned on the principal (called income), and profits (if any) from increases in value enjoyed by the principal (called capital gains). The rules you’ve written for the trust will determine who gets the income, capital gains and, ultimately, the principal. The recipient is called the beneficiary.
Beneficiary
Some trusts have lots of beneficiaries. They can be family members, friends, or charities — anyone you want, in any combination. Some trusts give the income to certain beneficiaries, while others get the capital gains and still others get the corpus — with the trust itself stating who is to get what and when (or under what conditions). It’s the trustee’s job to make sure all this happens in accordance with the provisions of the trust.
Because different trusts do different things, it’s routine for people to have more than one. In fact, having four or five trusts is not uncommon. In some cases, trusts are even created by other trusts or in a will!
Is a trust right for you? In our next blogpost we will show you the questions you need to answer in order to decide.