Revocable Living Trusts 301: powers of trustee.

Nils and nephew Lars are Co-Trustees of Nils's Revocable Living Trust. In that role they hold title to most of Nils's assets. Under statutory and common law and the written terms of the trust, they have authority over the assets pretty much the same as Nils would have if he owned the assets in his own name. It is a common misperception that if one puts an asset in a trust, then it can't be sold. That isn't so. In the trust Nils and Lars can sell and buy assets. They can also borrow money to help fund the assets of the trust. Sometimes a Trustor (the founder of a trust) restricts the power to borrow in the trust document, to reflect the Trustor's own philosophy of investing.

A trust agreement may give the Trustee the power to amend the trust itself. This might be limited to specific situations, for instance to conform to future tax requirements. A trust agreement might say the Trustee may modify the trust terms to accommodate the receipt of any stock in an S corporation, because only trusts with certain terms are qualified to own S corporation stock without serious tax problems. Or a Trustee might be authorized to amend in the event IRA or other retirement funds are received by the trust, since the terms of a trust affect the rate at which retirement funds must be withdrawn and taxed.

Another situation for possible amendment of a trust, if that power is given, is where a beneficiary is insolvent or might qualify for government assistance due to disability. The Trustee might then restrict distributions to the beneficiary, more than was the case with the initial trust language. The power to amend is sometimes given to a designated Trust Protector rather than to the Trustee. This has a comforting title (Trust Protector), but in your reviewer's experience it is not that commonly used. It might be because people often have enough trouble coming up with the name of a Trustee and one alternate, without also having to figure out who is going to serve as Trust Protector.

Apart from his role as Trustee, Nils as the Trustor (also called the Grantor or Settlor) has the power to amend or revoke his trust (thus it is called a Revocable Living Trust). So his mindset can be like that of the outright owner of the assets; he's not really accountable to anyone but himself. His Co-Trustee Lars must however take a different approach, that of a fiduciary. We'll explore this a bit next week in Revocable Living Trusts 401.