Understanding Living Trusts: Key Roles
A Living Trust involves three key roles. Often, the same person takes on more than one of the roles. We like to think of each role as a separate hat.
The first hat is the Trustor (also called a Grantor or Settlor). The Trustor is the person or people who create the Living Trust. The Trustor sets the terms of the Living Trust, including how it should be managed while they are alive and what happens to the assets in the Living Trust after they die. With a Revocable Living Trust such as we are discussing here, the Trustor retains the right to revise these terms during their lifetime as long as they have the capacity to do so. When the Trustor dies (or loses capacity), the terms of the Living Trust become irrevocable, meaning they cannot be changed.
The second hat is the Beneficiary. The Beneficiary is the person or people who are entitled to benefit from the assets in the box, by receiving funds or otherwise enjoying the use of property. During your lifetime, the Beneficiary of your Living Trust is you. When wearing your hat as Trustor, you make the rules for how and when the Beneficiary may use the assets. When wearing your hat as Beneficiary, you use and enjoy those assets. As Trustor, you can make different rules for different Beneficiaries. For example, you can grant a Beneficiary the right to use as many of the assets in the box as they want, up to depleting all of the assets. In contrast, you may say that the assets can be used only for expenses related to a Beneficiary’s education or heath care, or that a Beneficiary is only entitled to the income produced by the assets in the box but not the principal.
The third hat is the Trustee. The Trustee is the person who manages the assets in the box for the benefit of the Beneficiary according to the terms set by the Trustor. The Trustee can buy, sell, or distribute assets in the box so long as doing so complies with the terms you set in the Living Trust agreement.
During your life, you usually wear all three of these hats. You are the Trustor, Trustee, and Beneficiary of all the assets in your Living Trust. Placing your assets into the Trust does not diminish your ownership rights or restrict your ability to use or sell the assets. If you become incapacitated, the person chosen by you would become the successor Trustee and would manage the assets in the Living Trust for your benefit as the Beneficiary. After you die, the successor Trustee distributes the assets to the successor beneficiaries you have named or holds the assets in the box for the benefit of those beneficiaries if you have so instructed.
In the case of married couples, spouses usually, but not always, set up a joint Living Trust. In that case, both spouses wear all three hats during their joint lifetimes. Depending on the terms of the Living Trust, after the first spouse dies, the surviving spouse may continue wearing all three hats and have the power to change the terms of the Trust. In other cases, the surviving spouse may not have the right to change the terms of the Living Trust with respect to a portion of the assets in that Trust.