A grantor is someone that gives property to another person called the grantee. In estate planning, a grantor, also known as the settlor or trustor, transfers property to a beneficiary through a trust. In real estate a grantor conveys property to a grantee through a deed.
A trust is a separate entity that holds assets and property, typically intended for the grantor's beneficiaries. A grantor may open a trust as a way to distribute an inheritance to family and loved ones as part of their estate plan. With a revocable trust, the grantor has the ability to modify the trust — removing trust property, changing the trust beneficiary, or collecting and investing the trust income. The grantor can also revoke these privileges, which will help shield them from potential taxes and liabilities. If you create a trust, it's important to know what you can and cannot do as a grantor, since you will face different tax consequences.
A trust grantor is the creator of the trust
All revocable trusts are considered grantor trusts by the IRS
Grantors face different tax consequences on their trust assets, depending on their ability to modify the trust
A real estate grantor conveys property to the grantee
What is a trust grantor?
The grantor is the person who sets up a trust, which is an important part of an estate plan.
The grantor's responsibilities include:
Conveying assets and property into the trust
Designating the trust beneficiaries
Naming a trustee and a successor trustee
The trustee manages the trust, not the grantor, and they have the fiduciary responsibility to act in the best interests of the trust. Oftentimes the grantor chooses to act as trustee during their lifetime. When the grantor opens a trust and acts as trustee, they’ve set up a grantor trust, which we’ll talk more about next.
Generally, when the grantor acts as trustee, they have the power to modify the trust and remove trust property at will.
What is a 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 trust property. Under the IRS code, all revocable trusts are grantor trusts.
With a revocable trust (grantor trust), the grantor has the freedom to do the following:
Change the trust beneficiaries
Move property in and out of the trust
Invest the trust income
Receive the trust income or decide how the trust assets are distributed
Borrow trust funds without paying interest
Retain any administrative rights (like serving as trustee)
A revocable trust provides flexibility. For example, the grantor can retitle a car into their trust with the intention of passing it along to their son. If they needed to free up their cash flow, they could remove it from the trust and sell it.
If you are the grantor, it's important to know what level of power you 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 (more on that later.)
Can an irrevocable trust be a grantor trust?
The opposite of a revocable trust is an irrevocable trust, which cannot be dissolved except under narrow circumstances. Irrevocable trusts are typically non-grantor trusts under the IRS, but in some cases an irrevocable trust will actually be given grantor trust status, such as when it does any of the things listed above. If you want to open an irrevocable trust, you should to hire a legal professional like an estate planning attorney who understands the ins and outs of the Internal Revenue code; you don’t want to unintentionally create the wrong kind of trust.
Grantors and taxes
In general, a grantor's tax liability is tied to whether or not they have the ability to change the trust. The grantor will reap more tax benefits if they do not have the ability to revoke the trust.
Income tax liability
Even though assets and property may have been retitled into revocable trust for a beneficiary, they are still owned by the grantor for income tax purposes. That means the grantor must claim the assets on their own tax return and pay any applicable income tax on the money generated by the trust funds.
(By contrast, with a properly constructed irrevocable trust, when a grantor does not act as the trustee, the grantor would not have to pay taxes on the trust property. The trust would pay taxes on its own as a separate entity with its own tax identification number.)
Relatedly, if you're looking to qualify for government benefits, like Medicaid, and need to meet an income or asset limit, the earnings and assets in your revocable trust will be considered part of your income and assets. You can establish a Medicaid trust to help you qualify for long-term care from Medicaid.
Grantors and estate tax
Revocable trust assets and property are includable in the grantor's estate for federal estate tax purposes. If the gross value of the grantor's estate is over a certain amount, then estate tax will be due. The federal estate tax threshold is very high — $12.06 million in 2022 — so most estates won't have to pay it. Some states also levy their own estate tax.
To reduce potential estate and income tax liability, you should look to an irrevocable trust.
Grantor and grantee in real estate
The term grantor is not limited to estate planning. In real estate, a grantor transfers property to a grantee. A grantor and grantee can conduct real estate transactions through a deed. For example, a transfer on death deed allows a grantee to receive a house from the grantor, upon the grantor's death. Other types of deeds that a grantor can use include a quitclaim deed, warranty deed, and deed in lieu of foreclosure.