CTFA key terms

A legal obligation requiring a trustee to act solely in the beneficiaries' best interests, exercising the care, skill, and candor of a prudent person managing another's property. It is the source from which specific duties of loyalty, impartiality, and prudent investing flow.

The trustee's core obligation to place beneficiaries' interests above the trustee's own and to avoid conflicts of interest. It bars personal profit from the trust and generally prohibits transactions in which the trustee has a personal stake.

The obligation to treat all beneficiaries fairly, balancing the competing interests of income beneficiaries and remainder beneficiaries rather than favoring one group. It most often arises when allocating receipts and expenses between principal and income.

A transaction in which the trustee buys from, sells to, or otherwise deals with the trust for personal benefit. It is generally voidable by beneficiaries regardless of fairness, subject to limited statutory or trust-instrument exceptions.

The process of classifying trust receipts and disbursements as either principal, held for remaindermen, or income, distributable to income beneficiaries. State statutes such as the Uniform Principal and Income Act supply default rules and adjustment powers.

A statute- or court-prescribed report showing trust assets, receipts, disbursements, gains, losses, and distributions for a period, usually organized in principal-and-income format so beneficiaries can review the trustee's stewardship.

A court-ordered personal charge against a trustee for losses caused by breach of fiduciary duty, such as imprudent investments or improper distributions. The trustee repays the trust from personal funds rather than trust assets.

One of two or more trustees serving together, who must generally act unanimously unless the trust instrument or a statute provides otherwise. Each has a duty to participate and to prevent a co-trustee's known breach.

A trustee's power to transfer investment and management functions to an agent, permitted under the prudent investor framework when the trustee prudently selects and monitors the agent and defines the scope in writing.

A trustee who takes office after a prior trustee dies, resigns, is removed, or becomes incapacitated. The successor generally accepts the trust as it stands but must investigate possible claims against the predecessor.

The person who creates a trust by transferring property to a trustee and setting its terms. Also called settlor, trustor, or donor depending on the jurisdiction and context.

A trust created during the grantor's lifetime that the grantor may amend or revoke, commonly used to avoid probate and to manage assets during incapacity. Its income is generally taxed to the grantor.

A trust the grantor cannot unilaterally amend or revoke without beneficiary consent, a court order, or a reserved power. Irrevocable status generally removes the assets from the grantor's taxable estate.

A trust created by a will that takes effect only after the will is probated. Because it is funded at death, the assets pass through probate and generally receive a new income tax basis.

A will directing the executor to transfer assets not already titled to the grantor's revocable trust into that trust at death, catching overlooked property so the overall plan stays unified.

A right given to a holder to direct how trust property will be distributed among a class of beneficiaries. It may be general or limited, and its tax treatment depends on who holds it and to whom it may be exercised.

A trust provision barring beneficiaries from assigning their interest and shielding trust assets from most creditors until distribution. It supports trustee discretion and discourages creditors from pursuing trust property.

A person, often named in an irrevocable trust, holding limited powers such as removing trustees, changing situs, or amending administrative terms. The role adds flexibility without giving the grantor retained control.

A technique in which a trustee distributes assets from one irrevocable trust into a new trust with different terms, under state statute or common-law authority. It can extend duration, change trustees, or add protective provisions.

A trust designed to hold assets for a person with a disability without disqualifying that person from means-tested public benefits. Distributions must supplement, not replace, government support.

An irrevocable split-interest trust paying income to one or more noncharitable beneficiaries for a term or for life, with the remainder passing to charity. The grantor claims a charitable deduction and the trust is generally tax-exempt.

Dying without a valid will, so state statute determines who receives the property and who administers the estate. Distribution follows fixed family lines and may not match the decedent's wishes.

A distribution method dividing a deceased beneficiary's share among that beneficiary's descendants by branch, so each branch receives the share the deceased parent would have taken.

The modern standard governing trust investing, which evaluates each investment in the context of the whole portfolio and requires diversification, reasonable cost, and risk-appropriate return. It replaced rigid legal-list restrictions in most states.

Dividing a portfolio among asset classes such as equities, fixed income, and cash to balance expected return against risk. It is generally the largest driver of a portfolio's long-run volatility and return.

A written document setting the trust's investment objectives, risk tolerance, time horizon, permitted asset classes, and review procedures. It guides the trustee's decisions and provides evidence of a prudent process.

The degree of investment volatility and potential loss that the trust and its beneficiaries can accept, given objectives, time horizon, liquidity needs, and the grantor's expressed intent.

Spreading investments across issuers, sectors, and asset classes to reduce unsystematic risk. The prudent investor framework treats it as a core fiduciary duty rather than an optional technique.

A statistical measure of how widely returns vary around their average, commonly used as a proxy for an investment's volatility and risk. Higher values indicate a wider range of possible outcomes.

A temporary right of withdrawal, often lasting 30 to 60 days, given to trust beneficiaries so contributions qualify for the annual gift tax exclusion. The power is typically capped at the exclusion amount.

The per-donee amount a donor may give each year free of gift tax and without using any lifetime exemption. It applies only to present-interest gifts and is adjusted periodically for inflation.

An unlimited federal deduction allowing property to pass to a surviving spouse free of gift or estate tax, provided it passes in a qualifying form. It defers rather than eliminates transfer tax.

A marital-deduction trust paying all income to the surviving spouse for life, with the remainder going to beneficiaries the first spouse chose. A timely election on the estate tax return secures the deduction.

A federal tax on transfers to beneficiaries two or more generations below the transferor, imposed in addition to gift and estate tax. Each transferor has a GST exemption that can shelter such transfers.

The ability of a surviving spouse to use the deceased spouse's unused federal estate and gift tax exclusion, available only if the executor makes a timely election on the estate tax return.

The adjustment of inherited assets' income tax basis to fair market value at the decedent's death, erasing unrealized gain. It applies to property included in the gross estate, with limited exceptions.

The ceiling on how much trust income is taxable to beneficiaries and deductible by the trust in a given year. It also determines the character of the income beneficiaries must report.

Internal Revenue Code sections 671 through 679, which tax a trust's income to the grantor when the grantor retains certain powers or beneficial enjoyment. They are often used deliberately in irrevocable planning.

The minimum amount that must be withdrawn annually from most tax-deferred retirement accounts once the owner reaches the statutory age, with a penalty for shortfalls. These rules matter when a trust is named beneficiary.