Understanding the Trust Arrangement of Authority, Duties, Powers and Rights.

A trust is a legal arrangement where a person, called the settlor, transfers assets into the ownership and control of a trustee for the benefit of the trust beneficiaries. The arrangement involves one or more settlors, one or more trustees, and one or more beneficiaries.

The settlor (aka, the trustor or grantor) establishes the trust by signing the trust document and transferring assets (legal ownership and control) to the trustee. If the trust is revocable and amendable, then the settlor retains the authority (i.e., the right) to revoke the trust and return trust assets back to the settlor’s individual ownership and the authority to amend the trust terms (provisions).

The power to revoke a trust equates with true ownership of trust assets. The settlor of a revocable living trust essentially owns the assets (even if the the settlor is not the trustee). However, once the settlor is incapacitated or dies, the trust becomes irrevocable. It avoids probate because the successor trustee replaces the deceased settlor/trustee.

A settlor can authorize another person to exercise the settlor’s power to revoke a living trust. That means that even if the settlor is incapacitated the trust remains revocable so long as someone can revoke the trust. A settlor can also authorize another person to direct the actions of the trustee by delegating such authority.

Next, the trustee is the person who owns and controls the trust assets and administers the terms of the trust. If the trustee is not the same person as the settlor, then the trustee acts in a fiduciary capacity (i.e., as legal representative). A trustee has authority, duties and powers to carry out the terms of the trust for the sole benefit of the beneficiaries. The trustee of a revocable trust owes his or her duty first and foremost to the person who can revoke the trust.

A trustee can only exercise their powers as authorized in the trust in furtherance of the trustee’s duties (responsibilities) to administer the trust strictly according to its own terms. If a trustee fails to carry out their duties, according to the relevant standards, then the trustee is in breach of such duties. Such a trustee may become liable to the beneficiaries for any damages, and perhaps also for surcharges (penalties).

Next, beneficiaries are either current and future beneficiaries. A current beneficiary is a beneficiary with vested rights who is entitled to receive current distributions of income or principal. A future beneficiary is a contingent beneficiary whose rights have yet to vest, if at all, based on a contingency. For example, anyone who must survive the settlor to inherit is a future beneficiary. Future beneficiaries have a mere expectancy until such time as when the contingency is satisfied and the beneficiary becomes a current beneficiary.

A current beneficiary is entitled to request information from the trustee about the condition and the administration of the trust as relevant to the beneficiary’s interests. The current beneficiary is also entitled to an accounting after the first year of its administration. A current beneficiary also has standing to petition the court to replace a non performing trustee, and to instruct the trustee. Future beneficiaries have a mere expectancy.

Now, under the California Uniform Directed Trusts Act, a settlor can establish a trust where the authority to exercise the powers of the office of trustee are divided between one or more trust directors and one or more directed trustees. That is, the settlor can appoint a trusted individual as a trust director to make certain decisions usually made by the trustee. For example, the trust director may direct how the trust assets are invested, managed or distributed. The directed trustee must implement the trust director’s directions within the scope of the power of direction.

The foregoing brief discussion is not legal advice. Consult a qualified attorney for guidance. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.