Figures: tax year 2026
A trust is a legal arrangement in which a trustee holds and administers property for beneficiaries under a governing instrument. Legal ownership, management duties, and rights to benefits belong to distinct roles, although one person may occupy multiple roles.
The roles of grantor, trustee, and beneficiaries differ:
- Grantor: The person who creates and funds the trust, also called the settlor or trustor. The instrument identifies property, beneficiaries, distribution terms, and retained powers.
- Trustee: The individual or institution holding legal title in a fiduciary capacity. The trustee administers assets, maintains records, and follows the instrument and applicable law for beneficiaries.
- Beneficiaries: The persons holding beneficial interests. An income beneficiary may receive current earnings, while a remainder beneficiary receives property when the preceding interest ends.
Corpus, also called principal, is the property administered by the trustee, including contributed assets and subsequent additions properly allocated to principal. Securities, cash, and real estate can constitute corpus. Corpus describes managed property, not a fourth participant.
Common mistakes
- Principal authority mistaken for payment. Example 1 includes unused discretion; Example 2 includes the transaction that changes the classification.
- Voluntary payment mistaken for a requirement. Paying all income under a discretionary clause does not create the mandatory right needed for simple status.
- Principal assumed tax-free. A principal payment can carry remaining DNI; the accounting label does not settle beneficiary taxation.
Bottom line
- The grantor funds the trust, the trustee holds legal title and administers it, and beneficiaries hold beneficial interests.
- Corpus is trust principal, including contributed property and subsequent additions allocated to principal.
- Grantor status is tested before simple-versus-complex classification, and ownership can apply to only part of a trust.
- Simple trusts require current distribution of all accounting income, make no actual principal distributions, and satisfy the annual charitable restriction.
Exam shortcut
Start with retained powers. Mark an immediate right to recover the property before considering who received cash. For the nongrantor portion, separate the instrument from the transaction record. Underline the income requirement, then identify actual principal payments and charitable items. Treat “may accumulate” as a failure of the mandatory-income condition. Treat “may distribute principal” as a direction to inspect what actually happened.
The full lesson (about 2,915 words, 19 min read) adds 4 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- II.D1
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