This question is often asked by clients both during the estate planning process and in the trust administration process after someone has passed. Through this article, we plan to clear up a bit of the confusion surrounding this important role.
When someone decides to create a trust, whether it be a revocable living trust or a testamentary trust in a will, trust law requires the trust agreement designate a person or organization to fill a few important roles.
The first is the trustor who is the person, or people, creating the trust. They are sometimes referred to as the trustmaker, settlor, or grantor. All of these terms are synonymous with each other and we plan to go into this in a little more detail in a future blog article, so please stay tuned!
The second is the beneficiary. This is the person, group of people, or organization(s) that will ultimately benefit from the living trust's assets. Initially the trustor is also the beneficiary because with a living trust, you still retain the right to use your assets as you always have.
The beneficiary can be an income beneficiary, a beneficiary of the principle, or a combination of both. This too is a topic we will dive deeper into in another blog article in the very near future. (UPDATE: https://www.filippilaw.com/what-is-a-beneficiary-of-a-living-trust).
Finally, there is the trustee. This is the person or entity that will manage the living trust. If you were to think of a trust as a corporation, the trustee would fill the role similar to the CEO. The trustee manages the day-to-day operations of the trust, disburses funds, makes decisions on investments, and holds bare legal title to trust assets. The trustee is basically the manager of the trust.
Depending on the size and complexity of the trust, the role of trustee will have varying levels of difficulty. This makes choosing the right person or entity to serve as trustee crucial. They have a lot of power over the trust assets, so having trust in the trustee is important, and obviously inherent in the role's name.
The trustee will hold bare legal title to trust assets as well. Bare legal title simply means their name will appear on title documents, but they do not have the right to benefit from ownership of the asset. Title documents, whether a deed for a home, or a signature card for a bank account, will be in the name of the trustee as trustee of the trust. They will have the legal authority as trustee to transaction business involving the asset on behalf of the trust.
The concept of bare legal title is important in that the trustee does not have the right to the benefits of ownership. We call those equitable benefits, or equitable title.
Ownership of an asset can take on several forms. Such as the ownership of trust assets, where the trustee simply has the ability to take title for the purpose of managing the asset for the benefit of the trust's beneficiary, who enjoys the benefits of the asset. This legal separation of equitable and legal title is what makes a trust valid and provides many of the benefits of having a living trust.
People often confuse the trustee role with the beneficiary. The trustee, while entitled to reasonable compensation for their services (depending on the terms of the trust agreement), does not have the right to enjoy the asset for any reason. Except, of course unless the trustee is also a beneficiary. (See our previous blog article on this concept at https://www.filippilaw.com/can-a-trustee-also-be-a-beneficiary-in-a-california-trust.)
All of the roles of the trust are vital to the existence of the trust. If a trust lacks a beneficiary, the trust will likely fail. However, if the trust lacks a trustee, one can be appointed to serve in this role. Typically, the trust agreement will spell out how the trustee can be appointed if none of the named trustees can serve, or are unwilling to serve. But ultimately, the courts have the legal jurisdiction under the California Probate Code to appoint a trustee. The legislature did this primarily to protect trusts and ensure they will not fail simply because a trustor exhausted their list of trustees.
We hoped this helped clear up the confusions surrounding the trustee role. In a future article we will discuss who is able to serve as the trustee of a trust, so please visit us again soon. If you have any questions about a trustee, or any aspect of a trust, we welcome your questions!