An individual, business, or other legal entity is named as a grantor when they create a trust, a relationship that awards some asset to another. The term grantor is generally used in a legal context whenever the individual transfers ownership of some amount of assets through a deed.
The grantor not only creates the trust but also furnishes the assets of the trust itself. All funds, properties, or securities placed into the trust also transfer ownership to the trust itself. A grantor may choose to manage their own trust, making them a trustee, or they may relinquish control of the trust to an approved trustee. This decision often determines whether the property in the trust is considered taxable to the grantor.
Grantors have other common names and may also be referred to as settlors, trustmakers, or trustors. Individuals receiving the grantor’s assets may be called grantees or beneficiaries.
Grantors are often found either in a financial or funerary context. A grantor may award a trust as part of everyday financial dealings, or they may award a beneficiary a trust upon their passing. A grantor can also be used to refer to someone who sells a call or put option stock.
When a grantor creates a trust they can choose to either become the trustee or entrust it to someone else. If the grantor retains control over the assets in the trust it becomes known as a grantor trust. A grantor trust allows the grantor to modify the trust by adjusting the beneficiaries, the properties within the trust, and a number of other factors.
In exchange for the control granted by a grantor trust there is a cost to pay, literally. According to the internal revenue code, grantor trusts are treated as the property of the grantor, this means that the assets within will be counted against the grantor for income tax or estate tax purposes.
If a trust is instead handed off to a trustee to manage, that trust becomes a non-grantor trust and is not counted against the grantor for tax purposes. Additionally, non-grantor trusts are often irrevocable. This means that once they are created, the terms of the trust may not change. Trusts automatically become irrevocable when the grantor dies.
A trust created during estate planning is often an irrevocable trust since the trust only comes into being when the grantor passes away. These trusts are used to ensure that the grantor’s assets are properly distributed to the named beneficiaries after the owner dies.
A grantor may also leave a grantor trust to their beneficiaries. This can occur by having the grantor relinquish control of the trust after their passing. In this way, the grantor retains all of the benefits of the grantor trust during their lifetime.
The benefits of a grantor trust include the ability to earn a slight tax advantage by having the trust taxed at their income level instead of the more rapidly-scaling trust tax rate. The grantor trust also allows the grantor to retain control over who will receive the trust and under what circumstances up to the time of their passing rather than setting everything in stone during estate planning.
If you are seeking to become a grantor by establishing a trust, either for yourself or for future beneficiaries, you will need the help of an experienced trusts & estates attorney. A trusts & estates attorney can advise you on whether a grantor or non-grantor trust would better fit your needs as well as help you tailor your trust to fit your specific needs.
By leveraging their expertise in trust law, a trusts & estates attorney can help you gain the most possible revenues from your trust while subjecting it to as few taxes as possible.