Trustor: What it is, How it Works, Example

What Is a Trustor?

The term trustor refers to an entity that creates and opens up a trust. A trustor may be an individual, a married couple, or even an organization. Trustors generally make contributions of property to add to the trust. This can be done by donating money, gifts, and assets to other individuals.

Trustors normally set up trusts as part of their estate planning. Trustors do this by transferring their fiduciary duty to a third-party trustee, who maintains the assets in the trust for the benefit of the beneficiaries.

Understanding Trustors

Estate planning is a financial service that allows individuals and organizations to preserve, manage, and distribute assets in the event of illness and/or death. Assets that are commonly served in estate planning include money, properties, vehicles, investments, personal property (artwork, jewelry, and other valuables), life insurance policies, and debt.

The entity that sets up a trust is called a trustor. Also called a grantor or settlor, this individual hands over the fiduciary duty to another individual or firm. This party is referred to as the trustee. Both parties meet to determine the formation and details of a trust.

Trusts are legal entities that are designed to hold and safeguard someone's assets. As such, they provide a form of legal protection for any assets that the trustor wants to donate to their next of kin or other entities. Trustors may set up any number of trusts, including:

• Testamentary trusts: set up through the trustor's last will and testament
• Living trusts: set up when the trustor is still alive, giving the trustee the authority to manage assets for the beneficiary
• Blind trusts: set up without the beneficiaries' knowledge
• Charitable trusts: set up when the trustor is still alive with the express purpose of distributing assets to charities when they die

Trustors often set up trusts for a number of reasons. Trusts allow for the reduction of taxes and favorable tax treatment upon death, the protection of assets, the financial stability of young children, capital gains deductions, and the transfer of wealth between family members.

Special Considerations

The concept of fiduciary duty is central to the relationship between the trustor and trustee. The trustor transfers this responsibility to a trustee when turning over their assets. Fiduciaries are legally authorized to hold assets in trust for another person and obligated to manage these assets for the benefit of the other person rather than for his or her own profits.

As such, it goes without saying that trustees, pension administrators, custodians, and investment advisers are all prohibited from engaging in any fraudulent activity or manipulative behavior when working with beneficiaries.

When Things Go Awry

While trusts are usually set up to benefit heirs, these relationships may turn sour and create challenging legal and ethical situations. This was evident in the 2010 lawsuit surrounding the Rollins family trust, the founding family of pest control company, Rollins Inc.

The family's trustor, O. Wayne Rollins, passed away in 1991. His nine grandchildren fought their father and uncle—both trustees—in court for nearly a decade about how the trust was handled. The grandchildren claimed that their father and uncle violated trust documents and shifted more power to themselves, rather than acting as fiduciaries and distributing the wealth evenly among the grandchildren. The parties reached a confidential settlement in 2019.

There are other ways in which trust situations can become more complicated than the trustor intends. Investments within the trust may underperform, leaving beneficiaries without the assets they expected. Or trustors may change their minds about trust distribution or asset management, which can happen with a revocable trust.

Example of a Trustor

The public Securities and Exchange Commission (SEC) Form 3 for Paycom Software, filed April 26, 2018, details company insider Bradley Scott Smith’s statement of ownership of securities. Smith is the company's chief information officer (CIO).

The form notes that Smith holds his securities in the Bradley Scott Smith Revocable Trust as of Oct. 30, 2017. This trust benefits Mr. Smith, his spouse, and his children. As such, he is the trustor of the account. His spouse is a co-trustee.