Accounting – a report produced by the trustee, usually annually, that plainly states the trust’s beginning balances for the year, the purchases and distributions made throughout the year, the investment gains or losses throughout the year, and the year-end balances.
Beneficiary – the person for whom the trust has been established, and for whom the trustee holds, manages, invests, and distributes trust assets. There may be one or more beneficiaries of a given trust.
Decanting – you may be familiar with the process of decanting wine – pouring a bottle of wine into a larger and (usually) wider vessel, allowing the wine’s surface area to expand, so that the wine can “breathe,” to mellow and improve its flavor. Now imagine “pouring” trust assets from an old, restrictive trust agreement into a new, perhaps more expansive or flexible trust agreement, allowing the trust relationships to mellow and improve. Ok, that’s a bit flowery, but the point is that decanting (if permitted by the trust agreement or state law) allows the trustees and beneficiaries, working together, to change the terms of the trust agreement by moving the trust assets to a new agreement. If the trust agreement permits decanting, it is usually a straightforward process that involves the trustees simply distributing assets to the new trust. If not expressly permitted by the trust agreement, several states have laws that permit decanting, including Florida. Decanting under these laws involves a more detailed procedure in which the beneficiaries are notified in advance and given opportunities to object. Of course, a trust agreement may prohibit decanting under some or any circumstances.
Dynasty Trust – nothing to do with Chinese emperors or cheesy old TV shows, this term is given to trusts set up in certain states that have done away with the old rule on maximum lifespans for trusts (the old rule is known as the Rule Against Perpetuities). These states allow trusts to last forever (or close enough, like 360 or 1000 years), for many generations, thus the term “dynasty.”
Fiduciary – a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. Examples of fiduciaries are agents, executors, trustees, guardians, and officers of corporations. Unlike people in ordinary business relationships, fiduciaries may not seek personal benefit from their transactions with those they represent.
Generation-Skipping Transfer/Trust (GST) – part of the estate and wealth transfer tax terminology, the words “GST trust” typically describe a trust whose assets are permanently exempt from estate/GST tax. Conversely, a “Non-GST trust” or “Non-Exempt trust” will be subject to estate/GST tax at each generation’s passing.
Grantor – the person who establishes the trust, chooses the terms in the trust agreement, selects the initial and any successor trustees, and transfers assets to the trust. (The grantor is sometimes called the “settlor” or “trust creator”).
Grantor’s (or Settlor’s) Intent – used to guide the trustee’s decision making in all aspects of trust management, investment and distribution, the intent of the grantor with respect to those decisions, as shared with the trustee verbally, in writing, or in the trust agreement itself. Courts frequently look to Grantor’s Intent to settle disputes.
Income – trust income consists of the cash receipts produced by the trust assets. For example, if the trust owns an apartment building, the rents received by the trustee are trust income. Other examples include stock dividends, bond interest, and most partnership distributions. Determining and calculating trust income is important for tax purposes, but also for distribution purposes, especially when the trust agreement provides that a certain beneficiary is to receive all or part of the trust income. Nearly every state has enacted a version of the Uniform Principal and Income Act, which breaks down the rules on what is income and what is principal (see Principal, below), and how each is accounted for.
Power of Appointment – a flexible tool that gives a beneficiary the power to adjust the final disposition of trust assets. The reason to use this tool is simple – it is quite difficult to see into the future. This power allows those who will be in the best position to know all the circumstances surrounding an impending inheritance many years from now to make a judgment call about that inheritance. Example – your trust agreement says, upon your death, divide the trust assets into equal shares for each of your children, B and C. At their later deaths many years from now, the trust will divide the B & C shares into equal shares for their children. However, as it turns out years after your death, one of your grandchildren (a child of C) founds the next Google and becomes fabulously wealthy. C then uses the power of appointment you gave her (drafted right into the trust agreement) to direct that C’s share will pass to her other children at C’s death, bypassing the billionaire grandchild. Or perhaps one of your grandchildren turns out to be not such a great guy. C may exercise her power of appointment to reduce the black sheep’s share at C’s death. (This power is sometimes called a power of “disappointment,” meaning, “Don’t disappoint Mama.”) An even more powerful version of a power of appointment is a lifetime power. If C had a lifetime power of appointment, she could instruct the trustee to distribute funds – right away – to a family member or even her spouse (depending on how permissively you drafted the power).
Principal – trust principal, or corpus, consists of the trust assets themselves, taken as a whole. For example, if the trust owns an apartment building, a checking account, some stocks, and some timberland, all of these assets can be collectively called trust principal. Some trust agreements will permit the trustee to distribute trust principal to a beneficiary, or even permit a beneficiary to withdraw a portion of trust principal. Sometimes this is called “invading trust principal,” but that’s a bit dramatic. Principal distributions are in addition to, and generally do not reduce or affect other distributions of trust income. Nearly every state has enacted a version of the Uniform Principal and Income Act, which breaks down the rules on what is income (see Income, above) and what is principal, and how each is accounted for.
Settlor – the person who establishes the trust, chooses the terms in the trust agreement, selects the initial and any successor trustees, and transfers assets to the trust. (The settlor is sometimes called the “grantor” or “trust creator”).
Successor Trustee – a trustee who takes over when the current trustee resigns, dies or becomes incapable of serving. The trust agreement typically specifies one or more successor trustees and also provides for backups or for backup selection methods in the event none of the chosen successor trustees are available.
Title (or Legal Title) – ownership of assets. The person (or company) who holds title to an asset has legal ownership of that asset. In the typical sense, the same person holds the entire title to any given asset (e.g., John has title to the house). In a trust sense, however, title is split into two parts – legal title and beneficial (or equitable) title.
- Legal Title is held by the trustee, and the trustee is legally authorized to buy, sell, hold and otherwise transact with the asset.
- Beneficial (or Equitable) Title is held by the beneficiary, such that all of the buying, selling, holding and transacting is done on the beneficiary’s behalf and for the beneficiary’s benefit.
So: the trustee holds legal title for the benefit of the beneficiary.
Trust Agreement – the legal document that identifies the beneficiary and the trustee, and provides the terms of the relationship between them. This is sometimes called a trust instrument or declaration of trust (there are technical, historical differences between these that are sometimes forgotten, but that’s not terribly important).
Trust Creator – the person who establishes the trust, chooses the terms in the trust agreement, selects the initial and any successor trustees, and transfers assets to the trust. (The trust creator is sometimes called the “grantor” or “settlor”).
Trustee – the person (or company) designated in the trust agreement to hold the trust assets for the beneficiary’s benefit. There may be one or more trustees of a given trust. There are a few types:
- Individual Trustee – a trustee who is a natural (as opposed to unnatural?) person. Simple, right?
- Corporate Trustee – a corporation or other business entity formed and granted trust powers under state or federal law. Note that not just any corporation, LLC, etc. can serve as a trustee. The entity must be specifically granted trust powers. This usually means they are, or are part of, banks or other financial institutions (US Trust, Northern Trust, Bessemer Trust, are a few of the larger examples). Corporate trustees have all the same powers and responsibilities as individual trustees.
- Family (or Private) Trust Company – a corporation or other business entity formed by the grantor’s and beneficiary’s family and granted trust powers under state law to serve as a trustee. FTCs have all the same powers as individual trustees. FTCs may be formed in only a few states currently. Florida’s new FTC law is expected to go into effect Q3 2014, and we’ve been working on it.
Trust Protector – a third party designated in the trust agreement whose job is to step in at the beneficiaries’ or trustee‘s request to address a particular problem, exercise a power or resolve a dispute. For example, a Trust Protector may be given a limited power to amend the trust, to add or remove beneficiaries or even remove or replace trustees. Not every trust agreement appoints a Trust Protector, and the Trust Protector’s duties will vary from trust to trust. This is a highly customizable arrangement, and it is an important part of a comprehensive plan.