Grantor

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Blog Author :

Shayla McMurray

Edited by :

Vageesha Mishra

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Grantor Meaning

A grantor refers to a person who has created a trust to manage his/her assets and legally transfer them to the beneficiary to avoid inheritance issues. For instance, a grantor could be a father who has created a trust to control and manage his real estate property, money and investments and transfer them to his family upon his demise. Since it is a legal process, the terms of management, taxation and transfer will be specified in the agreement or a deed.

Grantor
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  • The grantor serves to be the individual who is responsible for granting, conveying, or selling a possession to some other party or individual.
  • A grantor in estate planning creates a trust that manages his/her assets and transfers them to the grantees. Usually, a trustee is appointed to manage the assets and activities of the trust.
  • There are many types of trust, such as revocable, irrevocable, living, testament, funded/unfunded, credit shelter, etc. They vary in legality, asset control, duties of the parties, rigidity and taxation.

Grantor in Trust

Essentially, the meaning of a grantor is someone who transfers the ownership of an asset to someone else who is referred to as a beneficiary or a grantee. Grantors exist in options contract working on behalf of others. They could also exist in a sales agreement, selling a property to a buyer. Other times, they are the ones losing their secured property to a mortgage debt upon non-repayment of the loan.

When we talk about a grantor in a trust, it refers to estate planning in most cases.

  • Grantors set up a trust to manage their possessions, assets, properties, money, investments, vehicles, etc. The trust will ensure that the beneficiaries get their share of the inheritance after the grantor's death. Grantors are known by many names, such as a settlor or a trustor.
  • Usually, a trustor appoints a trustee to control and manage the assets registered under the trust and distribute the property after the trustor's demise. Sometimes, a trustor assumes the duties of a trustee. The primary roles of a trustor involve -
    1. Preparing a deed and getting it signed by the pertinent parties.
    2. Conveying property and assets into the trust.
    3. Designating the respective trust beneficiaries.
    4. Naming the trustee and the successor trustee.
    5. Describing the details of asset distribution to the beneficiaries.
    6. Handling the income coming off investments, if any, made using the assets.
    7. Specifying tax-related information in the deed and ensuring tax compliance.
    8. Ensuring legal compliance.
    9. Specifying different terms of inheritance. For instance, not allowing inheritance until a grantee is an adult. Another example includes clauses like the Spendthrift clause, which will prevent beneficiaries from seeking a credit facility or a loan using their inheritance as a security against a debt.
  • There could multiple trustors, trustees, grantees to a contract depending on its terms. For instance, a family office managing the trust of a billionaires' family will have a set of trustees, trustors and grantees.
  • In practice, a grantor and trustee's role depends on the nature and the type of trust. There are many types of trust with varying legality traits, asset controls, rigidity and taxation.
  • A living trust remains valid for as long as the trustor lives. A trustor retains ownership and control over the assets if it is a revocable trust. Usually, the trustor is living off or making some money off these assets and as such, the trust assets are taxed under the trustor's name. Revocable trusts are devoid of estate-related tax benefits.
  • In a revocable trust, the trustor can also invest in securities and generate income for the trust. Revocable trusts give the trustor enough flexibility to bring in any changes to the deed. The trustor is free to add/remove assets and change the names of the trustee, beneficiary, etc.
  • In an irrevocable trust, the ownership and control fall completely into the trustee's hands, and the tax is not charged in the name of the trustor. While the trust gets a tax benefit on incomes and taxes earned on different assets, the trustor loses all the flexibility benefits of a revocable trust.
  • In both cases, a trustee will manage the assets registered in the trust after the trustor's passing and distribute them amongst the beneficiary as per the terms of the deed. Also, different jurisdictions will have different rules for the treatment of trusts.

Grantor Retained Annuity Trusts

A GRAT or Grantor Retained Annuity Trusts are irrevocable trusts with a fixed term. The primary reason for having a GRAT is to achieve tax benefits. A grantor uses this trust to transfer the beneficiaries certain high yielding assets, which have a chance of appreciating in value in the future without paying any taxes on them. The trustor also receives a fixed annuity which serves as a steady source of income with this trust.

If the assets appreciate beyond a "hurdle rate", the beneficiaries will be allowed to take the appreciated asset tax-free. A hurdle rate is the IRS Section 7520 rate, which is related to the interest rates and as such, they rise and fall in value.

If the assets' value under the GRAT exceeds the hurdle rate, beneficiaries will receive the assets at an appreciated value without paying any taxes. GRATs are usually a long term investment which gives plenty of chance for market fluctuations. If the assets do not appreciate, they will be returned to the grantor, who will only have to pay the legal fees for establishing a GRAT.

If the grantor dies, the assets will come back to him/her, and they will be charged under the estate tax. Some financial advisors suggest using high performing shares and stocks as assets under GRATs.

Irrevocable Grantor Trust

Apart from the trust's nature, state jurisdictions also determine if a trust is irrevocable or revocable. Like we mentioned previously, an irrevocable grantor trust contains terms that the trustor cannot modify. Besides, the ownership title of the assets is passed on to the trust.

In simple words, the assets' ownership goes to the trust, and the trustor relinquishes ownership claims over the assets. Assets get registered under the name of the trust; thus, the trustor will not be allowed to use them. A trustee will manage the assets. Trustees could be a beneficiary or a third party.

This trust gives protection against creditors as many times there are rules against giving away the assets as a security against a loan. This makes it difficult for creditors to get their hands on such assets.

At any point in future, if the trustor needs to use any of the assets from the trust, they will have to read through the terms of the irrevocable deed. In some cases, an irrevocable trust can change only after all the beneficiaries agree to the change. Moreover, rules for modification vary as per states, and some do not allow any modifications.

An irrevocable trust is treated as a separate entity from the point of view of taxation. The trust will be taxed as per the specific laws and will require its own tax identification number. The trustee will be involved in taking care of the tax duties and filing tax returns. They will need to use Form 1041 if the estate generates over $600 as gross income in a taxable year. Irrevocable trusts attract tax benefits such as Medicaid, but it depends on the amount of income taxed.