Trust Corpus (Principal): Definition, Duties, and Examples

Introduction

In US estate planning, the trust corpus is the property set aside in a trust to benefit one or more people. You’ll also hear it called the principal. The corpus can include cash, stocks, real estate, business interests, and other assets. The trust’s income (like dividends and interest) is usually separate from the corpus, and the trust document controls how each is handled and distributed.

People sometimes confuse trust corpus with estate corpus. Estate corpus is what a person owns at death before it’s distributed through probate or a will. Trust corpus is what’s actually titled in the trust. The two overlap when someone funds a revocable living trust during life or pours assets into a trust under a will.

Note: “Corpus juris” is a Latin phrase meaning “body of law” and has nothing to do with trust principal. For example, Corpus Juris Secundum is a legal encyclopedia.

This guide explains the essentials in plain English, with examples, practical steps, and quick references. It’s for education only and isn’t legal or tax advice.

What You’ll Learn

• What trust corpus (principal) is and how it differs from income
• How assets become trust corpus through proper funding and titling
• Trustee responsibilities for managing corpus under state law
• How allocation rules affect distributions to beneficiaries
• Common disputes involving mismanagement, valuation, and investment strategy
• Practical steps for grantors, trustees, and beneficiaries to keep records straight and reduce conflict

Core Concepts

What Is Trust Corpus (Principal)?

• Trust corpus is the property held in the trust for the benefit of the beneficiaries. It’s the “bucket” of assets the trustee manages.
• Typical components: cash, CDs, brokerage accounts, mutual funds, stocks, bonds, real estate, business interests, life insurance proceeds payable to the trust, and personal property (if properly assigned).
• The trust document (also called the trust agreement) sets the rules. It may limit how corpus can be used or allow distributions for health, education, maintenance, and support (often called HEMS).
• Trusts can be revocable (the grantor can change them during life) or irrevocable (generally fixed once funded). Either way, the assets titled to the trust make up the corpus.

Principal vs. Income: Why It Matters

• Income is money the corpus produces, like interest, dividends, rents, and certain royalties. Principal is the asset base itself.
• Capital gains are generally treated as principal unless the trust document says otherwise or a state statute allows a different approach.
• Allocation rules matter because they affect what gets paid out and what stays in the trust. Many states follow the Uniform Principal and Income Act (UPAIA), which sets default rules for classifying receipts and expenses.
• Some states allow a “unitrust” approach, converting the trust’s payout to a fixed percentage (commonly 3% to 5%) instead of traditional income. This can stabilize distributions and simplify accounting.

Funding and Titling the Corpus

• Assets only become trust corpus if they are retitled to the trust or assigned to it. Common methods:
  • Bank/brokerage: retitle accounts in the name of the trust.
  • Real estate: record a deed transferring property to the trust.
  • Business interests: amend ownership records and operating agreements as needed.
  • Personal property: use an assignment of interest and keep an asset schedule.
• Pour-over wills can move assets into a trust at death, but lifetime funding is often preferred to avoid probate delays and to ensure the trust operates as intended.
• Keep a current inventory of trust assets. Trustees should maintain statements, deeds, and valuations to track corpus value over time.

Trustee Duties and Standards of Care

• Trustees owe fiduciary duties to beneficiaries. Core duties include loyalty, impartiality, prudence, diversification (unless the trust says otherwise), cost control, and recordkeeping.
• Many states follow the Uniform Trust Code (UTC) and the Uniform Prudent Investor Act (UPIA). These set performance and process standards for investing trust corpus.
• A written investment policy statement (IPS) aligned with the trust’s purpose helps document the trustee’s approach to risk, return, and diversification.
• The trustee must follow the trust document first. If the trust is silent, state law fills the gaps.

Trust Corpus vs. Estate Corpus

• Estate corpus: the property a person owns at death before it’s distributed. It may pass through probate or by beneficiary designations or joint ownership.
• Trust corpus: the property titled in the name of the trust, either during life or by pour-over at death. If assets are already in a revocable living trust, they typically avoid probate.
• Tax note (high level): Assets included in a decedent’s taxable estate often receive a basis adjustment at death. Basis affects capital gains taxes when assets are sold later. Talk with a tax professional about your situation.

Key Examples or Case Studies

Real-Life Example: Sarah’s Family Trust

• Scenario: Sarah sets up a revocable living trust and funds it with $1 million in stocks and bonds.
• Corpus: The $1 million in invested assets is the corpus.
• Income: Dividends and interest are classified as income under most state laws and the trust document.
• Distributions: The trust directs the trustee to distribute income to Sarah’s grandchildren each year. The trustee reinvests capital gains and principal unless the trust allows principal distributions for education or other needs.

Case Study: Smith Family Trust (Education Support)

• Scenario: John Smith creates a trust to support his children’s education. He transfers a rental property and a $500,000 investment account.
• Corpus: The real estate and the investment portfolio form the corpus.
• Income and expenses: Rents, after property taxes, insurance, and repairs, count as income. Dividends and interest from the portfolio are also income. Capital gains are typically principal.
• Use of funds: The trust allows income distributions for tuition and related costs and principal distributions if needed to meet specific milestones (e.g., tuition shortfalls or medical needs).
• Takeaway: Clear trust language about when principal may be used reduces conflict and helps the trustee make timely decisions.

Case Study: Brown v. Trustee (Illustrative)

• Scenario: A trust holds $2 million across cash, stocks, and real estate. Beneficiaries claim the trustee’s investment choices led to large losses and that the real estate sat vacant too long.
• Issues: Did the trustee follow the trust’s terms and act prudently? Did the trustee monitor vacancy risk and diversify? Were records and annual reports provided?
• Court review: Courts look at process and compliance with duties, not hindsight. If the trustee ignored diversification, skipped valuations, or failed to document decisions, the court may find a breach of fiduciary duty.
• Outcome drivers: A documented IPS, regular rebalancing, property management steps, and clear communication with beneficiaries often determine the result.

Practical Applications

• For grantors (settlors)

  • Spell out distribution standards for income and principal (e.g., HEMS).
  • State whether capital gains can be distributed and under what conditions.
  • Address concentrated or special assets (family business, single-stock positions, real estate) and whether to retain or diversify.
  • Name qualified trustees and give them powers needed to manage and value assets.
  • Fund the trust during life to the extent practical and keep an asset schedule current.

• For trustees

  • Confirm title: Make sure each asset is properly in the trust’s name.
  • Inventory and baseline: Create a full asset list with values and estimated basis.
  • Investment process: Draft an IPS aligned with the trust’s goals and the UPIA. Diversify unless the trust allows a different approach.
  • Accounting and allocation: Apply your state’s UPAIA rules for principal and income. Know how to treat dividends, interest, rents, royalties, and capital gains.
  • Consider unitrust conversion if allowed by state law and consistent with the trust’s purpose.
  • Document everything: keep minutes, valuations, statements, rent rolls, and advisor reports. Provide beneficiary reports as required by the trust or state law.
  • Taxes: Coordinate with a CPA on Form 1041, Schedule K-1s, and DNI rules. Principal distributions generally aren’t taxable income to beneficiaries, but confirm details with a tax professional.

• For beneficiaries

  • Read the trust summary or ask for a copy if allowed by law.
  • Understand what counts as income vs. principal under the trust and state law.
  • Request regular reports and ask timely questions in writing.
  • If you have concerns, propose reasonable solutions (e.g., hiring a property manager or rebalancing an investment) before seeking court action.

• Common issues and how to address them

  • Investment strategy: Use an IPS, review annually, and explain the plan to beneficiaries.
  • Fiduciary duty claims: Avoid them by documenting decisions and following the trust.
  • Market swings: Use policy ranges and rebalance rules so changes don’t seem arbitrary.
  • Allocation disputes: Cite the trust’s terms and your state’s UPAIA provisions. If needed, seek a court order for complex issues.
  • Communication breakdowns: Provide clear, periodic reports and meeting summaries.

Summary Checklist

• Know the definitions: corpus (principal) vs. income
• Confirm proper funding and titling of each asset
• Follow the trust document first; apply state law where it’s silent
• Use a prudent, documented investment process; diversify unless justified
• Apply UPAIA rules for principal and income allocation
• Keep accurate records, valuations, and beneficiary reports
• Address special assets with specific plans
• Coordinate taxes with a qualified CPA (Form 1041, K-1s, basis, DNI)
• Consider unitrust conversion if allowed and appropriate
• Related terms worth knowing: beneficiary (cestui que trust), executor/executrix, passive trust, reversionary interest, lineal descendants

Quick Reference