Settlor of Trust: Definition, Roles and General Overview (2023)

A trust allows a property to be held by a third party for the benefit of another person, known as the beneficiary. The “settlor” establishes the trust. This settlor must transfer her property to the trust, while the trustee governs and manages it, albeit the settlor may reserve particular rights over the trust for herself. This article gives the definition of a settlor of trust, as well as the meaning. You may ask, “what happens when a settlor of trust dies?”. Read on.

What Is a Trust, and Why Set Up a Trust?

A trust is a fiduciary relationship in which one party, known as the trustor, grants another party, the trustee, the authority to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are created to offer legal protection for the trustor’s assets, to ensure that those assets are transferred according to the trustor’s desires, and to save time, reduce paperwork, and, in some situations, to avoid or decrease inheritance or estate taxes. In finance, a trust can also be a type of closed-end fund formed as a public limited company. A trust deed details the trust’s terms and conditions and lists the parties involved. In a trust deed, the settlor is simply the creator of the trust.

A revocable living trust is one of the most common types of trusts used in estate planning, and the same terminology describes parties to trusts. Accordingly, the settlor of a living trust is its creator.

There are numerous reasons why someone may desire to establish a trust. These are some examples:

  • To distinguish between the asset’s owner (the beneficiary) and control over the asset (the trustee). For example, where the recipient is under the age of 18 or has a handicap that interferes with their decision-making.
  • Allowing us increased tax planning options
  • To shield assets from financial claims made against the beneficiary. Also, to utilize as a business entity for either investment (for example, purchasing real estate) or trading.

Parties involved in setting up a trust

  • The settlor: The settlor is the person in charge of establishing the trust and naming the beneficiaries, trustee, and, if applicable, appointor. The settlor should not be a beneficiary of the trust for tax reasons.
  • The trustee (or trustees): The trustee (or trustees) manages the trust. He has a direct obligation to the beneficiaries and must always act in their best interests. The trustee carries out all trust transactions in his name.
  • The beneficiary or beneficiaries: The beneficiaries are the individuals or businesses for whose benefit the trust is established and managed. Beneficiaries can be primary beneficiaries (those mentioned in the trust deed). They can also be generic beneficiaries (who often are not named individually). The general beneficiaries are usually the major beneficiaries’ current or future children, grandchildren, and relatives.
  • The trust deed: The trust deed is a formal document. It specifies how the trust will operate and what the trustee is authorized to do. In the case of a testamentary trust, it is known as the will. It is critical that the trust deed or will be prepared by a solicitor.
  • The appointor: Many trusts, but not all, have an appointor. The appointor is crucial since they have the authority to appoint and dismiss the trustee.

Now,let’s see the definition of a settlor of trust.

Definition of a Settlor of Trust

A settlor is a person or entity who creates a trust. The settlor is also known as a donor, grantor, trustor, or trust maker. Whatever it is called, its job is to legally transfer control of an asset to a trustee. This trustee, in turn, oversees it for one or more beneficiaries. In some forms of trusts, the settlor may also be the beneficiary, the trustee, or both.

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In general, any individual 18 years of age or older and has a sound mind has the legal authority to create a valid trust, though specific state criteria differ.

Having known the definition, we’ll explain the settlor of trust further.

Explaining a Settlor of Trust

Trusts exist to hold money, investments, or property for a variety of purposes. Different forms of trusts—testamentary trusts, living (inter vivos) trusts, revocable trusts, irrevocable trusts, and others—protect assets in different ways. Trusts can help to ensure that assets are transferred smoothly and quickly after death, prevent probate fees, reduce estate taxes, and ensure that the settlor’s assets are used as intended. A trust, for example, can enable a parent to ensure that a kid does not squander an inheritance. Trusts also allow the settlor to decide when they are fully mentally capable, what will happen to their assets in the case of mental handicap or incapacity.

Setting up a basic trust can be a simple task that the settlor can complete with self-help legal paperwork or a more complicated process that requires an attorney and costs up to $2,000. If a bank or trust firm is a trustee, administrative charges to manage the trust over time will incur.

Example

Consider an example of a revocable living trust to learn how the settlor’s function works. Hailey, the settlor, sets the trust. She does this instead of making a will to determine what happens to her assets once she dies. That way, when Hailey dies, her assets will not have to go through probate. And because the process of distributing trust assets does not involve the courts, her assets will not become a public record.

She transfers all of her assets—her home, her beach condo, numerous family treasures, and several investment accounts—to the trust and retitles them in the trust’s name. Hailey selects a trust corporation as the trustee—the person or company in charge of managing and distributing the trust assets. The trust’s beneficiaries will be her three children following her death. However, while she is alive, Hailey will be the beneficiary despite the fact that she is also the settlor. Hailey can make adjustments to her living trust as long as she is alive having chosen a revocable living trust. For example, if one of her children develops a drug addiction, she can remove that child as a beneficiary.

(Video) Meanings of Settlor of Trust, Successor Trustee, and Trustor | RMO Lawyers

What Does the Settlor Do?

The settlor must turn over the agreed-upon sum to the trustee. The trustee must then hold it in accordance with the conditions of the trust for the benefit of the beneficiaries. To document this, the trustee must issue a receipt. At this point, the trust is formed since, by carrying out the trust deed and providing the agreed-upon sum:

  • The settlor has entrusted trust property to the trustee;
  • The settlor has defined for the trustee which persons are within the class of beneficiaries as indicated in the trust deed; and,
  • The trustee has committed to act.

The settlor then exits the picture.

In some countries, a settlor’s role is limited to establishing trust. The Income Tax Assessment Act of 1936[1] has tax ramifications when a settlor establishes trust and:

  • Has the authority to revoke or change the trust in order to obtain a beneficial interest in the trustee’s income or to take back trust property;
  • The income of the trust is payable to the settlor’s minor children.

In such a case, the ATO will assess the trustee of the trust as having to pay income tax on the trust’s income. This is opposed to income tax being assessed in the hands of the beneficiaries of the trust to whom distributions are made.

As a result, it is best to limit the settlor’s activity in a trust to the initial establishment of the trust and the payment of the agreed money. To avoid the impression that the settlor’s declaration of trust is revocable, the settlor should be unrelated to the trustee and the trust’s beneficiaries.

Consequently, some trust deeds clearly prevent the settlor (or their offspring) from being a beneficiary of the trust or otherwise benefiting from it.

(Video) Living Trusts Explained In Under 3 Minutes

Can a Settlor Serve as a Trustee of the trust?

Yes, the settlor of a trust can also be a trustee. A trust can also include more than one settlor and trustee. This is a common arrangement, such as when married couples establish a trust together.

Is it possible for a Settlor to be a Beneficiary?

A settlor may be a beneficiary of a trust, but he or she cannot be the sole beneficiary; otherwise, the trust would be pointless. Remember that the primary reason for establishing a trust is to hold the property for the benefit of another party; therefore, if there is no other party, having a trust makes no sense.

What happens when the settlor of a trust dies?

This will depend on the extent of any powers given to the settlor. In many lifetime trusts, the settlor is one of the trustees. In most cases, especially in the “standard” discretionary or flexible trusts supplied by life offices, the settlor is also the appointor under the trust. This means he has the right to appoint benefits under the trust over one’s lifetime. Obviously, when the settlor of trust dies, these powers will pass to the trustees.

An adviser will determine who the surviving trustees are and whether there is a sufficient quorum for them to make decisions.

If the settlor was the sole trustee at the time of his death, then, who can act depends on the jurisdiction governing the trust. The legal personal representatives of the previous trustee (here, the settlor) shall function as the new trustee. As a result, probate will have to determine who these persons are. These individuals will be eligible to function as new trustees or will have to nominate new trustees to carry on trust administration.

If the lone or last remaining trustee dies, the executors of the last trustee must get a separate confirmation (the equivalent of probate) in respect of the trust assets. The confirmation of the deceased’s estate is insufficient. Furthermore, after they have gotten separate confirmation on the trust assets, they will only be allowed to reclaim and deal with the trust assets as a stopgap measure – effectively, they will be in the same situation with respect to the trust assets as they are with respect to the deceased’s estate. They can, for example, distribute assets to beneficiaries who are absolutely entitled and can provide a legitimate receipt (i.e. over the age of 16). However, if the trust is to continue, they must designate new trustees. This is because the confirmation does not give them the title to serve as trustees.

(Video) What is the difference between a settlor and a trustee? | #AskAmity Episode 111

Frequently Asked Questions

What is a deceased Settlor?

A deceased settlor is a deceased person who, at the time of his or her death, had the power to revoke the trust in whole or in part.

What power does a settlor of trust have?

The settlor establishes a trust. He accomplishes this in two ways. First, the settlor creates the legal instrument that contains the provisions of the trust. Second, the settlor transfers property into the trust, a process called trust funding.

Who should be settlor of a trust?

A trust’s settlor can be anyone, whether they are appointed on a personal or professional basis. The professional settlor could be a trust lawyer or accountant. These individuals are usually highly skilled and can provide advice on complex situations. A settlor, on the other hand, can be a friend or family member.

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In Conclusion

Settlors create trusts by deciding how to transfer some or all of their assets to trustees. These trustees manage the trust’s assets on behalf of the beneficiaries. The regulations of a trust are determined by the terms under which it was established. In some locations, older beneficiaries can become trustees. For example, in some countries, the settlor can be both a lifetime beneficiary and a trustee.

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FAQs

What is the role of a settlor in a trust? ›

The settlor is the party that creates a trust, usually the donor. The settlor transfers legal title in some asset to the trustee. The settlor then provides in the trust instrument how that trust property is to be used for the beneficiaries. In the case of the inter vivos trust, the settlor can also be the beneficiary.

What is the difference between a settlor and a trustee? ›

The person who creates the trust is the “settlor." The settlor must transfer her property to the trust, which is then handled and administered by the trustee, or administrator, although the settlor may reserve specific powers to herself with respect to the trust.

Can a settlor of a trust be the beneficiary and trustee? ›

A person called the settlor (or trustor) creates the trust and puts the property in the trust. The settlor, trustee, and beneficiary can be different people. But, one single person could be the settlor, trustee and beneficiary.

Is the grantor of a trust the same as the settlor of a trust? ›

In estate planning, “grantor” and “settlor” mean the same thing. The settlor of a trust is the person who creates a trust. This includes funding the trust and making important decisions, like who should manage or benefit from the trust. This person is also sometimes referred to as a “trustor.”

What is the definition of a settlor? ›

A settlor is the entity that establishes a trust. The settlor goes by several other names: donor, grantor, trustor, and trustmaker. Regardless of what this entity is called, its role is to legally transfer control of an asset to a trustee, who manages it for one or more beneficiaries.

What powers does a settlor have? ›

Settlors. The settlor decides how the assets in a trust should be used – this is usually set out in a document called the 'trust deed'. Sometimes the settlor can also benefit from the assets in a trust – this is called a 'settlor-interested' trust and has special tax rules.

Does a settlor have control over a trust? ›

The settlor's role is to place the property into the trust, which is known as a settlement or gift. Usually, the settlement is for a nominal or small sum, such as $10. In general, a settlor has no further involvement in the trust after the initial settlement or gift.

Is a settlor of a trust a controlling person? ›

The settlor(s), the trustee(s), the protector(s) (if any), and the beneficiary(ies) or class(es) of beneficiaries, must always be treated as Controlling Persons of a trust, regardless of whether or not any of them exercises control over the activities of the trust.

Why cant a settlor be a beneficiary? ›

Why we exclude the settlor as a beneficiary. It's good practice to exclude the settlor of a trust from being a beneficiary to avoid the adverse consequences of section 102 of ITAA 1936, which allows the ATO to assess tax on the trustee of a revocable trust.

What happens to a trust when the settlor dies? ›

Death of a settlor under a DGT

The death of the settlor will mean that the settlor's rights terminate and the trust fund is available to the other beneficiaries. Remember that the settlor's rights under a DGT have no value in the event of his death.

Is a settlor automatically a trustee? ›

The settlor/donor is automatically a trustee for most trusts. You should appoint at least one other trustee so that there is someone to administer the trust if you die or become unable to deal with the trust. Ideally, there should be two additional trustees.

Can a settlor add a trustee? ›

A trust deed reserves power to the settlor to appoint and remove trustees. The settlor is not a trustee of the trust. The settlor has lost capacity and has a registered financial lasting power of attorney (LPA).

What are the positions in a trust? ›

A Trust involves three roles: (1) the Grantor (also known as the “Settlor,” “Trustor,” or “Trust-Maker”) who establishes the trust, (2) the Trustee (also known as the “Trust Manager”) who is given the responsibility to manage the assets of the trust in accordance with its instructions, and (3) the Beneficiary who ...

What is a settlor fiduciary? ›

Not all decisions directly involving a plan, even when made by a fiduciary, are subject to ERISA's fiduciary rules. These decisions are business judgment type decisions and are commonly called “settlor” functions. This caveat is sometimes referred to as the “business decision” exception to ERISA's fiduciary rules.

Can the grantor and settlor be different? ›

Settlor, grantor, and trustor are synonyms for the trust creator. Certain people may prefer to use one term over another, but they all mean the same thing.

Is the settlor the owner? ›

the 'settlor' - the person who puts assets into a trust. the 'trustee' - the person who manages the trust. the 'beneficiary' - the person who benefits from the trust.

Can a settlor dismiss a trustee? ›

A settlor can revoke a trust, if the original trust document allows this action. The trust is fully valid.

Can a settlor be related to a beneficiary? ›

The Settlor must be an independent person. The Settlor cannot be a trustee and cannot be a beneficiary of the trust, and their spouse and children cannot be beneficiaries. A trustee or a beneficiary of a trust cannot act as the Settlor.

Who is the controlling person of a trust? ›

Controlling Persons of a trust, means the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust (including through a chain of control or ownership).

Who has ultimate control of a trust? ›

Thus the ultimate control of a trust in fact lies with the appointor, and this is even more important than the shareholders of a corporate trustee.

Who owns the property in a trust? ›

Once a trust is formed and the assets transferred out of the founder's name, the trust owns the assets. Practically, this means that once the founder passes away, the assets in the trust will not form part of the deceased's estate and will not be liable for estate duty.

Can a settlor be dead? ›

The settlor is the person who settles property into the trust. This can be during the settlor's lifetime (an 'inter-vivos' trust) or on death (for example, under the terms of the settlor's will). A settlor of a trust created by will is often called a testator or testatrix.

Who should be the settlor of a trust? ›

The Settlor should be someone who does not have a primary involvement in the trust itself, with their sole role to establish the trust. The role of the Settlor is commonly held by the accountant or lawyer who assist in setting up the Trust.

What assets should not be in a trust? ›

What assets cannot be placed in a trust?
  • Retirement assets. While you can transfer ownership of your retirement accounts into your trust, estate planning experts usually don't recommend it. ...
  • Health savings accounts (HSAs) ...
  • Assets held in other countries. ...
  • Vehicles. ...
  • Cash.
Jul 1, 2022

What is the 10 year tax charge on trusts? ›

10 year periodic charge

This is known as the 'periodic', or 'principal' charge. Broadly, on each 10 year anniversary the trust is taxed on the value of the trust less the nil rate band available to the trust. The rate they pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%).

Does trustee have fiduciary duty to settlor? ›

However, as long as a trust is revocable, the trustee's duty is only owed to the settlor (the person who made the trust) of the trust. Another important fiduciary duty is the duty of prudent administration. There is no “winging it” when it comes to trust administration.

Does a trust end when the settlor dies? ›

The trust does not need to come to an end on the settlor's death, it can continue as long as is required by the trustees.

What are the three roles of a trust? ›

For example, each trust has three main roles in it: trustor, trustee and beneficiary.

Who are the three main parties to a trust? ›

There will always be three parties involved in a trust arrangement, the settlor, the trustee(s) and the beneficiaries.

Who are the key members in a trust? ›

—The person who reposes or declares the confidence is called the “author of the trust”; The person who accepts the confidence is called the “trustee”; the person for whose benefit the confidence is accepted is called the “beneficiary”; the subject-matter of the trust is called “trust property” or “trust money”; the “ ...

What happens if a settlor is a beneficiary? ›

As well as being the settlor, he is also the beneficiary as the trustees will be able to make payments of either capital or income to him. It is also important to remember that the appointment of the settlor as a trustee only would not have the same effect.

Can the settlor be the beneficiary? ›

A settlor or trustee can also be a beneficiary of same trust. Prior to setting up a trust, the settlor holds equitable title to the assets intended to be placed in trust.

Can a settlor change trustees? ›

A trust deed reserves power to the settlor to appoint and remove trustees. The settlor is not a trustee of the trust. The settlor has lost capacity and has a registered financial lasting power of attorney (LPA).

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