In Estate Planning, the legal term Grantor is used to identify the creator of a Trust. As the name suggests, a Grantor “grants” assets or property to a Grantee (beneficiary - the person or entity receiving the assets).
There are several roles a Grantor plays in Estate Planning beyond just creating the actual Trust. These roles can include identifying assets and property, as well as naming Trustees and beneficiaries.
Learn more about what a Grantor does and why Grantor Trusts are an important part of the Estate Planning process. We’ll cover everything here in detail, including:
What is a Grantor?
A Grantor creates a Trust. He or she is the legal and rightful owner of all property and assets that will be put into that Trust. While in real estate, the term “Grantor” is used to signify a property seller, when we’re talking about Estate Planning, the grantor definition is the entity creating a Trust.
The name “Grantor” can be used interchangeably with other terms such as a Settlor, Trustor, Trust Creator or simply, Creator.
Who is the Grantor of a Trust?
The Grantor is the person who creates and funds the Trust. They can also act as the Trustee, but this is not always the case, and it’s definitely not required. Sometimes, the Grantor can name themselves as beneficiary, but again, there are no rules about this - a Trust doesn’t need to be set up this way.
Grantor vs Grantee
A Grantor differs from a Grantee in that while the Grantor is the person who creates and owns the Trust, the Grantee is on the receiving end of things. To keep it simple, you can think of it like this: a Grantor is the person giving away (hence, granting) assets and property. And the Grantee is the person who gets the assets.
Grantor vs Trustee
There can be some confusion around the Grantor vs Trustee relationship. This stems in part from the fact that the Trustee can be the same person as the Grantor. But the Grantor can also (and often does) appoint someone else to fulfill this role.
A Trustee is the person who’s specifically named in a Trust to oversee, manage and one day distribute any assets the Trust holds. To complicate things, certain types of Trusts tend to name the Grantor as Trustee, too. For example, Revocable Living Trusts owners often name themselves at Trustee. In this case, the Grantor/Trustee generally names a Successor Trustee (a back up) to eventually manage the Trust after the Grantor passes away.
Settlor vs Grantor
A Settlor is just another name for a Grantor. Both reference the owner and Creator of a Trust. It helps to remember that regardless of the name, anyone who creates a Trust is just taking advantage of their legal right to control their own property and assets. They can accomplish this by placing the property and assets inside the Trust for the purposes of asset management, asset protection, privacy and other Estate Planning strategies.
What is a Credit Grantor?
While the names sound similar, and they’re sometimes confused, a credit grantor is actually very different from a Trust Grantor. But because there’s so much confusion between the two terms, it’s worth taking the time to explain a bit more.
A credit grantor is really just a credit card issuer. It’s the company that grants credit to borrowers. They can have the power to raise and lower interest rates and credit limits. They have the ability to charge fees in relation to transactions. They can assess penalties for things such as late-payments and over-limit-charges. And the most important thing to understand is that your ability to borrow can be canceled by credit grantors at virtually any time.
What is a Grantor Trust?
Grantor Trusts are Trusts that can be specifically (and strategically) created for estate tax and income tax purposes. Because of their nature, Grantor Trusts are a type of Revocable Living Trust for the lifetime of the Grantor.
A Grantor Trust allows the Grantor to maintain and protect his or her own wealth. It can also provide asset protection for named beneficiaries while reducing tax burdens. Perhaps most importantly, Grantor Trusts allow assets to remain outside the taxable estate value upon the Grantor's passing.
Common Grantor Trust Rules
Just like with most things in Estate Planning, there are some rules you should be aware of if you’re considering creating a Grantor's Trust.
While Grantor Trusts were at one time a vehicle more for just extremely wealthy people, that has changed. Tax rates used to graduate at a rate that was the same as income tax rates.
Now, due to rules that were implemented by the IRS to help control Trust misuse, income that’s generated from a Trust will graduate more quickly to a higher tax bracket. Because of the changes the IRS made to Grantor Trust rules, these vehicles are not as beneficial for those with great wealth as they once were. That said, they remain in use today for the benefits they do still offer. Some of these include:
Income is taxed at the Grantor's tax rate (instead of the Trust itself being taxed)
Considered “revocable,” which means changes can be easily made at any time
Trustees can be directed to make changes
Grantor can borrow from the Trust (without paying interest)
Trust income can be invested
Beneficiaries can be easily altered, added or removed entirely
Investments and assets inside the Trust can be modified as well
What Happens to a Grantor Trust When the Grantor Dies?
Once the Grantor of any Revocable Living Trust passes away, the Trust becomes Irrevocable (meaning it cannot be changed). Depending on how the Trust was initially set up, if the Grantor was also named as the Trustee, upon his or her passing, the Successor Trustee would then step in.
After the Grantor’s passing, assets and property inside the Trust would be managed or distributed per the Trust’s instructions. The Trust can either hold assets for future distribution (common when minor beneficiaries are named), or asset distribution can immediately come into play.
Can an Irrevocable Trust Become a Grantor Trust?
As a general rule, if a Trust is set up as Irrevocable, by definition, it cannot be considered a Grantor Trust. This is simply because an Irrevocable Trust is established so that amendments and modifications cannot be easily made. As we’ve seen, a Grantor Trust can be modified or even revoked entirely without much effort.
However, there are a few loopholes here. Any Irrevocable Trust that meets specific IRS requirements can essentially become a Grantor Trust. This could happen when the Grantor:
Continues to hold reversionary interest
Keeps administrative control over the Trust
Can control of beneficial enjoyment of assets or Trust income
Takes income from the Trust
Keeps the power of revocation
What is an Intentionally Defective Grantor Trust?
An Intentionally Defective Grantor Trust (IDGT) is a useful vehicle that allows Grantors to transfer significant wealth to family members even before the Grantor passes away. There are four different types of tax that relate to IDGTs, including gift, income, estate and generation skipping transfer (CGST). IDGTs are set up so the Grantor remains the Trust owner for income tax purposes. However, it removes assets that were contributed from the Grantor’s overall estate.
Grantor Trusts can be a great component to an Estate Plan. They can provide protection while still allowing for flexibility and control. But as we’ve seen, there are a lot of moving pieces to a Grantor Trust, so it’s important to understand the benefits and caveats of this powerful Estate Planning vehicle upfront.
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