Personal Trust

What Is a Personal Trust?

A personal trust is a trust that an individual creates, formally naming themselves as the beneficiary. Personal trusts are separate legal entities that have the authority to buy, sell, hold, and manage property for the benefit of their trustors.

Understanding a Personal Trust

Personal trusts, which can be revocable or irrevocable, living or testamentary, may be used to fund worthy causes such as higher education, while simultaneously helping to reduce or eliminate estate taxes. Furthermore, they can be either separate taxable entities or pass-through entities, which pass their taxes through an individual income tax code, rather than a corporate code.

To establish an irrevocable personal trust for the purposes of paying for their own or their children’s education, the trustor (also known as the "settlor" or the "grantor") would first seed the entity with the assets she or he has set aside for this purpose. The trustor will usually than seek out the advice of a trust or estate lawyer, to complete the establishment process. Next, the trustor would source a custodian, which is a financial institution responsible for safeguarding its customers' assets.

Finally, more often than not, trustors appoint investment advisors to manage their trusts, until it comes time to withdraw the assets held within. This typically first involves a robust kick-off discussion, to hash out the investment polices that best align with the trustor's objectives, risk profile, and time horizon. Investment advisors will then customize an asset allocation model accordingly, that may contain varying amounts of growth stocks, income stocks, and fixed income investments.

When hiring an investment advisor, trustors should strive to source reliable practitioners, with proven histories of honoring their fiduciary responsibility to manage trusts in their clients' best interests. Far to often, investment advisors buy and sell stocks, simply to generate commission and line their own pockets. For this reason, trustors should make sure advisors adhere to the agreed-upon investment policy standards set forth in the trust agreement.

For example, if the trustor explicitly stated that the chief focus should be to protect his assets and keep pace with inflation, while generating modest growth, the advisor should avoid investing in high-risk/high-reward opportunities--even though they carry the potential of earning high returns and generating wealth for the fund.

Personal Trust Services

Many bellwether asset managers offer personal trust services. For example, Charles Schwab offers trustee services in the following three capacities:

1. Sole trustee: This role assumes all investment, administrative, and fiduciary responsibilities of managing the trust, according to terms that the trustor clearly defines.
2. Co-trustee: In this role, Charles Schwab assumes responsibility in tandem with another trustee that an individual trustor designates. In this arrangement, Charles Schwab will also assume full investment management responsibilities, yet may share some discretionary decision-making with the co-trustees.
3. Successor trustee: In this capacity, the firm takes over in the event that the trustor or a co-trustee an individual has named, is no longer willing or able to serve in their intended role.

A trust must file an income tax return if it receives income. The trust's income may be distributed to beneficiaries, or treated as trustees' income, or it may be a combination of the two.