Personal Trust

A personal trust is a trust that a person creates for him or herself as the beneficiary. A personal trust can accomplish a variety of objectives. Personal trusts are separate legal entities that have the authority to buy, sell, hold and manage property for the benefit of their trustor.

Personal trusts can take many forms. They can be revocable or irrevocable, living or testamentary. They can fund education expenses, meet special needs of beneficiaries or allow them to avoid or reduce estate taxes. They can also be separate taxable entities or pass-through entities. (These entities pass their taxes through an individual income tax code rather than a corporate code.)

A person may set up an irrevocable personal trust to pay for their own or children’s education. In this situation, the trustor would create the trust with the assets that she or he has set aside to seed the trust. Following this she or he will usually seek the advice of a trust or estate lawyer to complete the process, along with a custodians to hold the asset and potentially additional investment advisors to manage them until it is time for withdrawal. A trustor will usually set up an investment policy to guide the investment advisor in managing the trust for growth or modest income, depending on the objectives of the trustor and when she or he will need the funds.

The investment advisor will have a fiduciary duty to the trustor in managing the trust funds, obligating them to manage these assets for the benefit of the other person rather than for his or her own profits. Fiduciaries are absolutely prohibited from engaging in any fraudulent or manipulative behaviors when working with beneficiaries. In addition, they must adhere to the investment policy set forth in the trust agreement. For example, if the trustor has explicitly stated that she or he would like to focus on protecting the assets and keep pace with inflation, along with generate modest growth. The fiduciary may not invest in high-risk, high-reward opportunities even if they believe in the bets’ abilities to grow the wealth of the fund.

Many asset managers offer personal trust services. Charles Schwab, for example, offers to be a trustee in three capacities:

1. A sole trustee that assumes all investment, administrative, and fiduciary responsibilities of managing the trust according to terms that the trustor clearly defines
2. A co-trustee, in which 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-trustee(s).)
3. A successor trustee, in which the firm takes over in the event that the trustor or co-trustee that an individual has named is no longer willing or able to serve