What is a licensor?

A licensor is an individual or other entity that creates a trust (i.e. the person whose assets are placed in the trust), whether the settlor is also acting as curator. The licensor may also be referred to as the colonizertrustmaker or trust.

A grantor may also designate the seller, or writer, call or put option contracts who receives the premiums for which the options are sold. Options are sold through exchanges to option holders who are responsible for paying the premium.

Key points to remember

  • A settlor is the entity that establishes a trust and legally transfers control of those assets to a trustee, who manages them for one or more beneficiaries.
  • In some types of trusts, the settlor can also be the beneficiary, the trustee, or both.
  • A cedant can also refer to an options seller, who earns a premium when selling options contracts.

Understanding donors: the creators of trust

The settlor is the person who creates a trust, and the beneficiaries are the persons identified in the trust to receive the assets.

The assets of the trust are provided by the settlor. The property and associated funds are transferred into the ownership of the trust. The settlor may act as a trustee, allowing the management of the assets contained therein, but this is not required. If the grantor is the trustee, the trust is called a grantor trust. Non-grant trusts are still funded by the grantor, but control of the assets is relinquished, allowing the trust to operate as a separate tax entity from the grantor.

What are trusts?

Trusts are designed to hold money, investments or property for various purposes. Different Types of Trusts—testamentary trusts, inter vivos trusts, revocable trustsirrevocable trusts, etc., protect assets in different ways.

Trusts can facilitate a smooth and rapid transfer of assets upon death, eliminate approval costs, minimize property taxes, and ensure that the grantor’s assets are used in the manner intended. For example, a trust can allow a parent to ensure that a child does not squander an inheritance. Trusts also let the settlor decide (at a time when they have full mental capacity) what will happen to the assets in the event of future mental disability or incapacity.

Understanding licensors: option sellers

Synonymous with “options seller”, a licensor creates contracts to sell options for an underlying interest or asset. For example, let’s say a settlor has sold a call option or taken a short position on a call option. If the call option is exercised, the settlor must then sell the underlying share to the exercise price.

Conversely, if the licensor sells a put optionthe licensor is said to be long and must purchase the underlying stock at strike price. Acting as an options seller is relatively risky, especially on a naked position when the author is not actually in possession of the property that is the subject of the contract.

What are option contracts?

Options are contracts that give the buyer and seller the right, but not the obligation, to buy or sell a particular asset at a specified price, called the strike price, on a specified date. These contracts are backed by the presence of the underlying asset, which may consist of a particular stock, an exchange-traded fund (ETF) or other applicable financial products.

The option seller, or licensor, has no authority as to whether the option will be exercised before the contract expires. In cases where a settlor anticipates a loss based on the position, it may elect to enter into a secondary transaction with another party to offset the risk associated with the obligation.

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