What is a grantor’s role in estate planning?

A grantor is a person who creates a trust. They may or may not be able to modify it.

Elissa

Elissa Suh

Published October 18, 2019

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KEY TAKEAWAYS

  • A trust grantor is the creator of the trust

  • All revocable trusts are considered grantor trusts by the IRS

  • Grantors face different taxes on their trust assets, depending on their ability to modify the trust

  • A real estate grantor conveys property to the grantee

In estate planning, a grantor is the person who creates the trust. A trust a separate entity that holds assets and property, is typically intended for the grantor’s beneficiaries. A grantor might start a trust as a way to distribute an inheritance to loved ones and family.

With a revocable trust the grantor has the ability to modify the trust — that might be by retitling assets in and out of the trust, changing beneficiary designations, or collecting and investing the trust’s income. The grantor can also revoke these privileges, which will help shield them from potential taxes and liabilities. But the grantor of an irrevocable trust cannot change the trust at all, except under limited circumstances.

If you created a trust, it’s important to know what you can and cannot do as a grantor, since it will affect your income taxes. As a legal term, grantor has different definitions depending on the circumstances. In real estate, a grantor is someone who conveys a property to another person or entity, called the grantee.

In this article:

What is a trust grantor?

In estate planning, the grantor is simply the person who created the trust. Also called the settlor, the grantor has the ability to convey assets and property into the trust.

The grantor is not the person in charge of _maintaining _the trust. That would be the trustee who manages it. The trustee has a fiduciary responsibility to act in the best interests of the trust. Often times the grantor chooses to act as trustee as well.

The grantor’s responsibilities:

  • Convey assets and property into the trust
  • Designate the beneficiaries
  • Name a trustee and a successor trustee

Generally, the grantor has the power to modify the trust – but can choose to give up this ability, most likely for tax purposes. More on that next.

Grantor trust

A grantor trust is a term typically used by the Internal Revenue Service (IRS) to describe any trust where the grantor retains the ability to make changes regarding the assets.

For example, you are the grantor and named your antique car into a trust with the intention of passing it along to your son. If you needed to free up your cash flow, you could retitle it and remove it from the trust to sell it. This would make the trust a grantor trust.

Other characteristics of a grantor trust include the grantor’s ability to:

  • Change the beneficiaries
  • Receive the trust’s income or decide who receives it
  • Invest the trust’s income
  • Borrow money from the trust without paying interest
  • Retain any administrative rights (such as acting as trustee)

Under the IRS code, all revocable trusts are grantor trusts. If you are the grantor, it’s important to know what level of power you can exercise over the trust – namely whether you amend or modify the trust in any way — since it will determine if yours is a grantor trust, which in turn will dictate any tax implications.

Can an irrevocable trust be a grantor trust?

There are some circumstances when an irrevocable trust will actually be treated as a grantor trust, such as when it does any of the things listed above. The Internal Revenue code is complex and difficult to understand, so it might be helpful to talk to a legal professional like an estate planning attorney to make sure you don’t unintentionally have a grantor trust when you wanted an irrevocable trust.

Learn more about how irrevocable trusts work.

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Takeaway

A trust is a legal entity that can protect your assets for use by you or your loved ones.

Taxes and liabilities for grantors

Trusts need a taxpayer identification number (TIN) to pay taxes. The type of TIN used by a trust is the employer identification number, or EIN, which is used by all business entities.

The grantor trust does not need its own separate EIN while the grantor is still alive. Since the grantor ultimately retains a measure of control over this type of trust, he or she owns all trust assets, from an income tax perspective. That means the grantor must claim any assets on his or her income-tax return or to pay income tax on the money generated by the trust funds.

Even though assets and property may have been retitled into the trust for a beneficiary, they are still owned by the grantor. For this reason, if you are sued, your creditors can come after the assets in your trust.

Similarly, if you’re the grantor and you’re are looking to qualify for government benefits, such as Medicaid, and need to meet an income or asset limit, the earnings and assets in your trust will be considered part of your income and assets.

For both potentially reducing tax liabilities and asset protection planning you should look to an irrevocable trust, which you cannot modify.

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