Settlor Meaning and Its Functions

This post was originally published on May 7th, 2024, and updated on May 19th, 2025.

In legal terms, a settlor is key in establishing a trust. The settlor, also known as a trustor or grantor, is the person or entity who creates and funds a trust. By transferring assets or property to the trust, the settlor defines the rules under which the trust operates, designating beneficiaries and outlining the terms under which those beneficiaries will receive the trust's assets. This article delves into the settlor's role, the process of creating a trust, and the responsibilities and rights of being a settlor.

Key Responsibilities of the Settlor

The responsibilities of a settlor involve much more than simply transferring assets. As the individual or entity that creates the trust, the settlor’s actions will determine how the trust functions and how the assets will be managed. These responsibilities are outlined in the trust document, which legally binds the trustee to fulfill the settlor’s intentions.

1. Creating the Trust Agreement

The settlor’s first responsibility is drafting or setting the terms for the trust agreement. This legal document outlines the fundamental terms of the trust, including

• Who the beneficiaries are
• What assets will be included in the trust
• How the assets will be managed or distributed
• The role of the trustee

In creating the trust agreement, the settlor must clarify their instructions to prevent future disputes or mismanagement.

2. Choosing the Trustee

The settlor has the important task of selecting the trustee, the person or entity responsible for managing the trust’s assets. The trustee must be someone the settlor trusts to manage the assets according to the trust’s terms. The settlor can choose a family member, friend, or a professional trustee, such as a bank or trust company. The trustee selection is essential as they uphold the settlor’s intentions and distribute the assets accordingly.

3. Funding the Trust

Once the trust is created, the settlor must fund it by transferring ownership of assets into the trust. This may include real estate, financial accounts, business interests, or other valuable assets. Without funding, the trust has no purpose or function. The settlor must know which assets they wish to place into the trust and ensure the transfer is executed correctly.

Types of Settlor-Defined Trusts

Settlor-defined trusts can vary based on their terms and the flexibility granted to the settlor. Different types of trusts serve distinct purposes and have varying degrees of control and influence for the settlor.

Revocable Trusts

A revocable trust, also known as a living trust, allows the settlor to maintain control over the assets during their lifetime. They can alter, revoke, or dissolve the trust as they see fit. This type of trust is commonly used in estate planning, allowing the settlor to retain control while ensuring a smooth transition of assets to the beneficiaries upon death.

• Control: The settlor retains full control over the assets.
• Flexibility: The trust can be changed or revoked at any time.
• Avoiding probate: A revocable trust can help assets pass outside the probate process upon the settlor’s death.

Irrevocable Trusts

An irrevocable trust, once established, cannot be altered or dissolved by the settlor. Once the settlor transfers assets to the trust, they relinquish ownership and control. This type of trust is typically used for tax planning, asset protection, or charitable purposes. The settlor may not modify the terms of the trust after its creation, which provides greater security for beneficiaries.

• Irrevocability: The settlor cannot change the terms once established.
• Tax advantages: Assets in an irrevocable trust may be exempt from estate taxes.
• Asset protection: The assets are protected from creditors once transferred.

Testamentary Trusts

A testamentary trust is created under the settlor’s will and does not occur until their death. The settlor’s will dictates how the trust will operate, who the beneficiaries are, and how the assets will be distributed. This type of trust is often used to manage assets for minors or individuals with special needs.

• Post-death activation: The trust only occurs after the settlor’s death.
• Control through a will: The terms are established in the settlor’s will.
• Beneficiary protection: It can help beneficiaries who need assistance managing their inheritance.

Settlor’s Rights Over the Trust

While the settlor’s role in creating the trust is pivotal, their rights over it depend on the trust they establish.

Rights in Revocable Trusts

In revocable trusts, the settlor has considerable rights:

• Control: The settlor can modify, revoke, or terminate the trust anytime.
• Asset Management: The settlor may retain the right to manage the assets or name themselves trustees.
• Beneficiaries: The settlor can change the beneficiaries or the terms of distribution during their lifetime.

Rights in Irrevocable Trusts

In irrevocable trusts, the settlor has fewer rights, as they no longer retain control over the assets once they are transferred:

• No modification: The settlor cannot alter the terms of the trust.
• Limited involvement: The settlor cannot manage the trust assets unless specified by the trust agreement.
• Beneficiary interests: The settlor cannot change the beneficiaries without their consent.

Rights in Testamentary Trusts

In testamentary trusts, the settlor has no rights once they pass away:

• Control through the will: The settlor’s will dictates the terms of the trust.
• Posthumous effects: The trust’s terms are only practical after the settlor’s death.

Settlor’s Role in Estate Planning

The settlor plays a critical role in estate planning, particularly in using trusts to manage assets after death. By creating a trust, the settlor ensures that their estate is distributed according to their wishes, providing protection and support to beneficiaries.

Asset Protection

For many settlors, creating a trust protects their assets from creditors, taxes, and potential litigation. Irrevocable trusts, in particular, can shield assets from being seized, offering greater security for the settlor’s estate.

• Creditor protection: Assets in a trust are not accessible by creditors of the settlor.
• Tax benefits: Certain trusts offer tax advantages that benefit both the settlor and the beneficiaries.
• Estate planning: A trust helps ensure assets are distributed according to the settlor’s wishes without court intervention.

Trusts for Minors and Special Needs Individuals

Settlers can establish trusts to protect minor children or individuals with special needs. These trusts ensure that the assets are used appropriately for their benefit, often by a trustee responsible for managing the funds.

• Minor beneficiaries: Trusts can hold assets until the beneficiary reaches a certain age.
• Special needs trusts: These trusts provide financial support while preserving eligibility for government benefits.

Who Can Be a Settlor?

A settlor can be any individual or entity capable of owning property. This includes:

1. Individuals

In most cases, a settlor is an individual who wants to transfer assets to a trust for the benefit of their chosen beneficiaries. This can be someone planning their estate, seeking to provide for family members, or wishing to protect assets for future generations.

2. Entities

It is also possible for an entity, such as a corporation or charitable organization, to act as a settlor. In such cases, the entity would typically establish a trust to achieve specific purposes, such as charitable giving or managing a family foundation.

• Corporations: Can establish trusts for managing employee benefits, pension funds, or other financial instruments.
• Charitable organizations: Can set up trusts for philanthropic purposes, such as maintaining an endowment.

3. Trustees as Settlors

In some instances, a trustee may also act as a settlor, particularly in family trusts where a family member is both a trustee and a settlor. However, such arrangements require careful legal planning to protect the trust's integrity and the interests of the beneficiaries.

Common Mistakes Made by Settlors

Despite the importance of setting up a trust, settlors often make mistakes that can affect the trust’s effectiveness. Some common errors include:

1. Failure to Fund the Trust

One of the most frequent mistakes made by settlors is failing to fund the trust properly. Without transferring assets into the trust, the trust has no assets to manage or distribute. This can lead to complications for beneficiaries and defeat the purpose of establishing the trust.

2. Not Updating the Trust

A trust may become outdated as circumstances change. The settlor may forget to update the trust after significant life events like marriage, divorce, or childbirth. Failing to update the trust can result in assets being distributed contrary to the settlor’s intentions.

3. Choosing the Wrong Trustee

Selecting the right trustee is critical to the trust’s success. A settlor may mistakenly choose someone who is not capable or willing to manage the trust effectively. Choosing a trustee without the requisite financial knowledge or experience can result in poor asset management and harm to the beneficiaries.

4. Ambiguous Terms

A poorly drafted trust with vague or ambiguous terms can lead to misunderstandings and disputes among beneficiaries. The settlor must clearly outline how assets should be managed and distributed to avoid conflicts down the line.

5. Inadequate Tax Planning

A trust can result in unexpected tax liabilities without careful consideration of tax implications. The settlor should work with professionals to ensure the trust is structured to minimize tax exposure and maximize benefits for beneficiaries.

By avoiding these mistakes, settlors can ensure that their trusts are established and managed according to their wishes, providing their beneficiaries with security and peace of mind.