Settlor

Published on :

21 Aug, 2024

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A settlor refers to an individual or entity that forms a trust and transfers the legal title of the property or asset in the trust to a designated trustee. Also, they provide guidelines for managing the trust asset for beneficiaries' best interest.

They are also known as grantors or donors in some jurisdictions. They are not only the creators of a trust but also play diverse roles. Moreover, a settlor decides who will be the beneficiaries and also prepares the trust deed, which states all the terms of a trust. Hence, they facilitate estate planning and wealth management.

Settlor Definition

A settlor is a person or entity (legal owner of the assets) responsible for setting up a trust and passing on the legal title of the assets to the selected trustee. They will manage the property, funds, or investments in the trust until these are transferred to the designated beneficiaries.
The grantor also prepares the trust deed or agreement and declares the guidelines for the trustee to act in the best interest of the beneficiaries in a trust instrument.
The donor has the power to modify the trust terms and benefit structure and even dissolve the trust if required.

Settlor Explained

A settlor is someone who owns certain assets, property, investments, or funds and initiates the formation of a trust. Moreover, they transfer these assets to the trust and select a trustee to ensure that these assets are used for the benefit of the designated beneficiaries. This is mentioned in the trust deed and instrument. It can be any individual who is at least 18 years of age with sound mental status or a corporation.

Every trust needs a settlor. But there can be various kinds of trusts based on the purpose of their establishment and settlor objectives, as listed below:

1. Living Trust: An inter vivos trust enables the donor to benefit from the trust assets during their lifetime and pass on the same to the beneficiaries after their demise.

2. Testamentary Trust: Such an arrangement fulfills the purpose of the last will created by a grantor. It is established only after their death.

3. Revocable Trust: The settlor is free to make changes or even dissolve a revocable trust.

4. Irrevocable Trust: A grantor cannot amend or terminate an irrevocable trust without the consent of beneficiaries or judicial intervention.

5. Settlor-Interested Trust: In a settlor-interested trust, the donor of the trust retains the majority of benefits associated with the trust asset.

In a simple revocable trust, a settlor often has the right and power to change the trust conditions, beneficiaries, and even trustees. Also, they can dilute trust in specific circumstances. A trustee is a person or corporation, like a bank, responsible for managing and controlling the trust assets. However, if at any point the settlor finds a trustee to engage in fraudulent activities they may ask for proper accounts related to the trust assets.

Roles

A settlor of trust, in most cases, is the owner of the trust assets who performs diverse roles as shown below:

1. Forms a Trust: The settlor is the person whose primary responsibility is to set up a trust. They do this by creating a legal document called a trust deed.

2. Designates a Trustee: The settlor or guarantor also assigns a trustee who is liable for managing the trust.

3. Decides Beneficiaries: Such a donor identifies and mentions the names of all the beneficiaries in the trust deed.

4. Transfers the Assets: Another critical role played by a guarantor is to hand over the control of assets, property, or investments in the trust to the trustee.

5. States Terms and Conditions: Such an individual or corporation forms a trust instrument that bears all the guidelines. The trustee must follow these to act in the best interest of the trust and ensure the beneficiaries' benefit.

6. Makes Changes or Cancels the Trust: The settlor has the power to modify the trust while altering its guidelines or beneficiaries and even terminate such an arrangement in some instances.

7. Ensures Trustee Compliance: The donor even states provisions for the trustee in the trust deed to make sure that the latter abides by the ethical and legal standards to serve the trust objectives.

Examples

Let us understand the concept better with the help of examples:

Example #1

Let’s say Maria, a retiree with substantial financial assets, decided to establish a charitable trust to support educational initiatives in her community. Acting as the settlor, Maria transferred a portion of her investments and real estate holdings into the trust. In the trust agreement, she outlined her specific objectives. She specified that the trust's primary purpose was to fund scholarships for deserving students pursuing higher education. As the settlor, Maria also defined the eligibility criteria for scholarship recipients. Moreover, she establishes guidelines for the trustee to follow in managing and investing the trust assets.

While Maria was no longer the legal owner of the assets placed in the trust, she retained a deep sense of involvement by being actively engaged in the selection of the trustee and setting the parameters for the trust's charitable mission. Maria's role as the settlor reflected her commitment to philanthropy and her desire to leave a lasting legacy in the form of educational opportunities for future generations. Through her thoughtful planning and generosity, Maria's trust serves as a testament to the impactful role a settlor plays in shaping the purpose and direction of a trust for the benefit of the community.

Example #2

Consider Alex, an entrepreneur with a thriving business empire. Recognizing the importance of succession planning, Alex, acting as the settlor, decides to establish a family trust. In this role, Alex transfers ownership of a substantial portion of the business, along with other assets, such as real estate and investments, into the trust. The primary objective is to ensure a smooth transition of the family's wealth to the next generation while providing for the financial well-being of family members.

In the trust document, Alex lays out specific terms and conditions, appointing a professional trustee with expertise in business management and finance. The trustee must oversee the business operations and make strategic decisions to maintain and grow the trust assets. Alex outlines a gradual distribution plan for the beneficiaries, including provisions for educational expenses, entrepreneurship endeavors, and home purchases.

Recognizing the dynamic nature of the business environment, Alex incorporates flexibility into the trust, allowing for adjustments to the distribution plan based on the business's performance and the changing needs of the beneficiaries. While Alex relinquishes direct control over the assets, the trust serves as a vehicle for preserving the family legacy and fostering financial security for future generations. Through this hypothetical example, Alex demonstrates the crucial role of a settlor in proactively shaping the trajectory of family wealth and ensuring its sustainable growth.

Expenses

The settlor expenses are those that are made solely for the purpose of funding the services that aid the plan sponsor's benefits. However, it is not paid from the plan assets. Below are some of these costs:

Creating the initial plan and trust deed;
Charges of ASC 715 accounting computations and sponsor's financial disclosures;
Adjustments or alterations made in benefit structure or trust deed;
Expenses in the case of termination of the plan;
Cost of examining plan modifications; and
Consulting advisors for plan creation, termination, or modification.

Settlor vs Trustee vs Beneficiary

The settlor, trustee, and beneficiary are three different parties with diverse roles in a legal arrangement called trust. Let us discuss their dissimilarities:

Basis	Settlor	Trustee	Beneficiary
Definition	An individual or entity who is often the owner of assets and responsible for forming a trust.	A person or corporation like a bank is responsible for preserving and managing the assets on behalf of the settlor for the beneficiaries' benefit.	Beneficiary refers to a third party or individuals who will ultimately receive the legal possession of the trust assets as per the trust agreement.
Age or Other Requirement	18 years or above, a mentally capable person	18 years or above, mentally capable person or reputed estate management firm	No such requirement
Roles and Responsibilities	Establishes a trust, designates a trustee, decides beneficiaries, transfers assets in trust, creates trust instrument bearing terms and conditions	Ethically managing and controlling the trust assets before the transfer	Receiving the assets on transfer
Asset Ownership	The actual owner of the asset before it is transferred	Holds legal title of assets until transferred to beneficiaries	The final owner of the trust assets after the transfer
Control	Prepares trust deed and instrument to establish guidelines, terms, and conditions for trustee	Handle trust according to the settlor's instructions	No control
Legal Obligations	Formation, amendment, or dilution of trust	Trust management and control for beneficiaries' benefit	No legal obligation

Frequently Asked Questions (FAQs)

1. Can a settlor be a trustee?

The settlor and trustee have different responsibilities in a trust; however, in many situations, the settlor as trustee is responsible for creating and managing the trust at the same time. One such example is a trust by a married couple, where the beneficiaries are their children.

2. Can a settlor be a beneficiary?

While a settlor cannot be the only beneficiary of a trust in most of the arrangements, an exceptional can be an Asset Protection Trust (APT).

3. Does a unit trust have a settlor?

A unit trust has a settlor who is liable to form such an arrangement. Also, the settlor transfers the legal title of the units to the trustee for the benefit of the unitholders and also prepares the trust deed.

4. Can a settlor be the trustee of an irrevocable trust?

A settlor can be the trustee of an irrevocable trust since such an individual or corporation cannot modify the trust terms and conditions or benefit structure without the court's intervention or beneficiaries' permission. However, it is always better that distinct parties undertake these two roles.