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What is a Grantor Trust?

Estate Planners | Monday, August 22nd, 2011

One type of grantor trust that is useful in estate planning is a grantor trust. This trust allows the grantor (the individual who establishes the trust) to have control over the trust assets and receive income that is created from the trust. The grantor trust is often called a living trust or a revocable trust. To fully comprehend the grantor trust, it is pertinent have an understanding of how the trust is established and what sets it apart from other types of trusts.

Establishing the Grantor Trust

This trust is named such due to the fact that it is established during the lifetime of the grantor. This trust is revocable, which simply means it can be altered, modified, and otherwise changed or even terminated during the life of the grantor, provided that the grantor has full mental capacity. Upon the death of the grantor, the grantor trust then reverts to an irrevocable trust and will be administered per the instructions contained within the trust instrument.

Grantor Trusts and Trustees

Within the trust instrument, a trustee is designated. The grantor can also serve as trustee, but if the grantor does not have the expertise or the time to serve as such, the grantor can appoint an experienced trustee for the trust. A trustee is responsible for managing the trust’s assets and for carrying out the goals and objectives that are outlined in the trust instrument, as well as handling all trust paperwork and reporting requirements that govern the trust. The trust instruments will also have a contingency plan that will govern the event of the grantor’s death.

Grantor Trust Advantages

There are quite a number of benefits of the grantor trust, the greatest of which may be that the assets that are held within the trust will not be subjected to probate court. At the time of the grantor’s death, the trust immediately considered as a separately recognized legal entity. Because there is no wait time in probate, the trust’s beneficiaries can have immediate benefit from assets in the trust. Further, because grantor trusts do not have to go through probate, the cost of trust administration is much less than some other types of trusts that has to go through probate. For example, the grantor trust typically will not require that the trustee file the customary yearly accounting for trust assets that is required by probate court with some other trusts.

When the trust’s grantor is also the trust’s trustee, a separate income tax return is often unnecessary. If the grantor makes any gifts made by the grantor trust during the grantor’s lifetime, the gifts may be subject to the gift tax. Property in the grantor trust is included in the grantor’s estate and is subjected to the estate or so-called death tax.

A grantor trust may be the best type of trust for your particular situation. Consult with an estate planner to find out if the grantor trust is suitable for you and your family.

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