Trust Terminology

Many professions and disciplines have their own vocabulary. Often this vocabulary defines complex ideas yet can be defined with relative ease to a person not accustomed to the jargon. For example, think about the terminology used in medicine and law. If you’ve not been taught the words they are using, doctors and lawyers may be difficult to understand.

Let’s examine some key terms regarding trusts to better understand what a trust is and what the vocabulary surrounding it entails.

Elements of a Trust

Think of a trust as a container, a place to hold assets (for instance, cash or securities). It is an arrangement in which the ownership of assets is given to someone else, the trustee—usually a financial institution such as ours, but sometimes an individual. The trustee keeps possession of and control over the assets in the trust and is said to have legal title of these assets, which allows the trustee to exercise most property rights. The trustee’s responsibilities and duties regarding the trust’s assets are outlined in the trust agreement.

The trustee manages the assets in the trust for the trust beneficiaries, the recipients of the trust’s income and principal. The beneficiaries are considered to have equitable title to the trust’s assets, meaning that they have the right to benefit from the assets managed by the trustee.

For Whom Trusts are Established

The most common term to describe the person who establishes a trust is grantor.  Other terms are settlor or trustor. Beneficiaries may be described as either primary or secondary. A primary beneficiary is someone who is entitled to receive immediate benefits from the trust’s assets. A secondary beneficiary’s interest in a trust is subordinated or lower ranking to that of the primary beneficiary.

When initially creating a trust, one person (or persons such as a husband and wife) may be the grantor, trustee and beneficiary. This would mean that they have established the trust, maintain control over it, and are entitled to receive the benefits of the trust. This is typically the case when a married couple creates a trust for estate planning purposes. Furthermore, the trust will name a successor trustee, which is a financial institution or individual, who steps in when the original trustee(s) is incapacitated or dies.

Descriptions of Trusts

Trusts may be revocable or irrevocable. A revocable trust is the more flexible of the two. The grantor can make any changes to the trust that he or she feels are warranted, at any time, and can cancel the trust altogether, if necessary. An irrevocable trust is set in stone. The trust agreement generally may not be changed or cancelled.

Sometimes a trust is referred to as a grantor or nongrantor trust. The status of a trust as grantor or nongrantor affects the grantor’s federal income and estate tax liability. In a grantor trust, the grantor holds such a degree of control over the trust’s assets that he or she is considered the owner of the assets for tax purposes.

Understanding the vocabulary associated with trusts is crucial for anyone navigating this complex area of financial planning. Although, understanding trust terminology may not make everything crystal clear. Our team at Central Trust Company is here to help take the guesswork out of trust and estate planning and help guide you in making informed decisions regarding your wealth and overall financial plan.