Settlor

What is a settlor of a trust?

A settlor is someone who creates or establishes a trust, either for the benefit of a beneficiary after the settlor’s death and/or for their own benefit during their lifetime.

The trust settlor typically owns assets that are then legally transferred into a trust which is managed by a trustee based on the terms and conditions that the settlor outlined when creating the trust. In some circumstances, the settlor can also be the trustee and the one receiving benefits from the established trust.

A settlor of a trust expresses their goals for how they want their assets to be managed and distributed after their death and/or while they’re alive. A settlor may create a trust because they may not want their private interests and wishes disclosed in the public proceedings of probate or for a host of other reasons listed near the bottom of this definition.

What’s the process of becoming a trust settlor?

When an individual decides they want to use a trust to pass their assets in a specific way or to minimize taxes, they can either work with an estate planning attorney or draft a basic trust online. 

At the time of creating the legal document known as the trust agreement, the settlor outlines the terms and conditions of the trust, including its purpose, and the assets that’ll be placed into it. The settlor can specify how and when beneficiaries get to receive distributions and the duration of the trust.

In the process of creating a trust, the settlor gets to choose the beneficiaries – the individuals or entities entitled to receive benefits from the trust. The beneficiaries can include family members, friends, charities, or other parties designated by the settlor. 

Additionally, the settlor gets to decide on the trustees who will oversee the assets and distribute them to the beneficiaries in accordance with the settlor’s wishes.

In order to become a trust settlor, one has to be 18 years or older and of sound mind to enter into a legal contract based on the state they reside in.

Can a trust have multiple settlors?

A trust can have more than one settlor. More than one individual can create and fund the trust. This is often seen in the case of spouses creating a joint revocable trust where they are both settlors or grantors of the trust. In many cases, they may also be joint trustees.

What is a trust settlor? A real-life example

To illustrate the importance of the settlor in a trust, let’s look at Mary whose assets total over $15 million and include various investment accounts, two houses, and a highly valued gold jewelry collection that she wants to pass on to her three children. 

Because Mary values privacy and doesn’t want the distribution of her assets to have to go through probate, she looks into creating a trust as one of her estate planning strategies. She also learns that certain types of trusts allow her to remove assets from her estate so she can save on estate taxes and pass the maximum amount of wealth to her heirs. 

As a settlor, Mary moves the desired assets into a trust by using a general transfer of assets document. She names her three children as beneficiaries and a trust company recommended by her financial advisor as the trustee. Without Mary acting as the settlor of the trust, there wouldn’t be anyone to create or fund the trust in the first place.

What kind of powers does a settlor of trust have once the trust is established?

In the case of a revocable trust, the settlor often retains the ability to make changes to amend or revoke the trust during their lifetime. Irrevocable trusts, on the other hand, typically cannot be modified or revoked by the settlor.

If the trust settlor becomes incapacitated, they may no longer have the ability to amend or control a revocable trust. If the settlor is also the trustee, the successor trustee might then take full control over administering the trust on behalf of the settlor.

What’s difference between settlor vs trustee?

While a settlor establishes and funds the trust, a trustee is an individual or entity that manages and distributes assets out of the trust. Trustees owe fiduciary duty to the beneficiaries, meaning they must act in the best interests of the beneficiaries at all times.

The settlor designates one or more trustees to administer the trust according to the terms of the trust agreement.  Trustees are usually required to keep accurate records of all transactions related to the trust and provide periodic reports to beneficiaries, detailing the trust’s financial status and activities. Trustees are also responsible for overseeing and investing the assets, as well as distributing them to beneficiaries as specified in the trust document by the settlor of the trust. 

While the settlor may delegate day-to-day management of the trust assets to the appointed trustee, they may still be able to play an active role in ensuring that the trust operates as intended.

Can a settlor be a trustee?

Absolutely! The settlor and the trustee can be the same person. This is often the case with revocable trusts in which settlors name themselves as a trustee so they can manage trust assets while they’re alive and then name a successor trustee to care for and distribute the assets after their death.

If a settlor outsources the management of the trust to a trustee, they can be specific about how the trustee should distribute the trust assets. The settlor may also be able to reserve certain trust powers to themselves, depending on the exact type of trust used.

Is there a difference between settlor vs grantor?

In the world of trusts, you may sometimes hear the same thing referred to by several names. This is the case with “settlor” which can also be replaced by the term “grantor” or “donor,” depending on the state or jurisdiction where the trust is established. Whether referred to as settlor, grantor, or donor, this is the individual who creates the trust.

What are some reasons why settlors create trusts?

Here are some of the most common reasons why settlors may choose to create trusts:

Provide for loved ones

Settlors often create trusts to provide for family members, including minor children, disabled individuals, or beneficiaries who may not be financially responsible. Trusts can ensure that assets are managed and distributed for the beneficiaries’ well-being over time.

Reduce or minimize estate (and income) taxes

Settlors can use different estate tax planning strategies to minimize estate taxes. They may also consider certain types of trusts, such as grantor-retained annuity trusts (GRATs) or charitable remainder trusts (CRTs) for income tax planning purposes.

Protect assets from creditors

Some settlors create trusts with the intent to protect assets from creditors and potential lawsuits. In this case, trust settlors often opt for irrevocable trusts that remove the assets from their estate.

Provide for special needs beneficiaries

Settlors who have loved ones with special needs can use a trust to ensure that the individual receives financial support while preserving eligibility for government benefits.

Make a difference through charitable giving

A trust settlor who is charitably inclined may use charitable trusts to support their favorite charitable organizations while potentially receiving tax benefits.

Enable a smooth business succession

Settlors who own businesses may use trusts to plan for the succession of their business interests, ensuring a smooth transition to the next generation of owners.

Plan around Medicaid benefits

Some individuals may even create irrevocable trusts as part of their Medicaid planning strategy to protect assets while still qualifying for Medicaid benefits for long-term care.

How can a settlor determine how to distribute their assets?

In determining how to best distribute their assets, individuals should first start by taking a big-picture look at all the assets they have. If that individual decides that a trust would be the solution to pass on their assets, they can then become a settlor and outline how they’d like their assets to pass.

In looking at a map of all of their assets by using estate planning software like Vanilla, individuals can see how each asset is currently titled and whether it has a named beneficiary. This allows them to then make a more informed decision about taking on the role of the settlor, naming beneficiaries and trustees, and outlining the terms and guidelines of their trust.

A settlor planning out the distribution of their assets should also be mindful to anticipate various scenarios and contingencies. For example, what would happen if a beneficiary passed away or became incapacitated? How should assets be distributed in these situations? Planning ahead can help settlors ensure that as many potential contingencies are covered as possible so that their legacy can be passed on in a way that aligns with their wishes.

If you have a client who’s ready to set up a trust but doesn’t know where to start, use our  estate planning checklist to help them outline the documents they might need as they prepare to become a settlor of a trust.