Estate planning is a complicated topic that involves a lot of specialized jargon. Sometimes it’s easy for us practitioners to forget that not everyone is as well-acquainted with that jargon as we are. With that in mind, I thought it would be helpful to provide a brief list of important vocabulary words related to trusts—some of the most complex estate-planning structures.
So, here are some common terms you’ll hear related to trusts and what they mean.
Grantor, Trustee, Beneficiary
The person who creates a trust is known as the grantor, trustor, or settlor. “Settlor” is used because establishing a trust sometimes goes by a more technical phrase: “settling” the trust. The person who manages the trust assets is the trustee. And the person or persons for whose benefit the trust is established are the beneficiaries.
A grantor funds his or her trust by transferring property into it. Then, the trustee manages that property solely for the benefit of the beneficiaries. The trustee may be paid for his or her services or may serve without compensation.
Revocable vs. Irrevocable Trusts
I’ve covered the difference between revocable and irrevocable trusts in the past, because it comes up quite often. So, here’s a simple refresher: A revocable trust, also known as a living trust, is one that can be changed or revoked at any time. An irrevocable trust normally cannot be revoked.
Revocable trusts are common in California estate planning, because they offer the flexibility of a Will (i.e., they can be changed at any time) but avoid the time and expense that probating a Will requires.
Irrevocable trusts are commonly used by wealthier Californians who are concerned with the estate tax. That’s because effective lifetime planning for the estate tax requires making completed gifts (transfers that can’t be revoked) and using up part of the lifetime exemption before death.
Principal (Corpus) vs. Income
Trust accounting is a highly complex type of accounting, but it’s important to understand at least the distinction between trust corpus (or principal) and trust income. Corpus is the property that is to be managed and invested by the trustee. Income is what that property earns during a year.
That distinction is important because the trust documents can distinguish between income and corpus for purposes of distributions. For example, a trust may say that all income for the year is divided between the beneficiaries, but the corpus cannot be distributed. That helps maintain the trust’s holdings and ensure that it can have adequate funds to continue producing income in the future.
Mandatory vs. Discretionary Distributions
Trusts are remarkably flexible legal structures. One way you can see this is in the distinction between mandatory and discretionary distributions. Trusts generally provide for distributions to the beneficiaries, either of income or corpus, or both. But it’s up to the grantor to structure when those distributions are or can be made.
If the grantor requires that the trust make distributions each year, or upon the occurrence of a certain event, then those distributions are mandatory. The trustee cannot refuse to make them. In contrast, the grantor could leave it up to the trustee when and how to make distributions. In that case, the distributions are discretionary.
I hope you’ve found this brief vocabulary lesson helpful. If I’ve done it right, it should not only help you understand some of the technical terms you’ll often hear me and other estate-planning lawyers use, but it should also give you some ideas about how you might structure a trust for yourself as part of your estate plan.
If you have any questions about these terms, about trusts, or about estate planning generally, please feel free to contact me at any time.