Grantor Trusts

Tax Professionals' Resource
September 11, 2012 — 1,401 views  
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Although the grantor trust has been around for decades, it has recently been found to be a very useful tool in estate planning. This type of trust, also known as a revocable trust or a living trust, allows the individual who establishes it, the grantor, to retain control over the assets named in the trust and to receive any income the trust generates. Grantor trusts were avoided in the past primarily because the income created by the trust is taxable to the grantor.

Establishing a Grantor Trust

Establishing a grantor trust is no different than establishing any other type of trust except that the grantor must be given certain powers within the body of the trust. Any trust that gives the grantor the following powers can be treated as a grantor trust for tax and legal purposes:

• The grantor retains reversionary and revisionary powers over the corpus and income of the trust. This means that the grantor can revoke or change the trust at any time. 

• The grantor may benefit from the corpus or the income of the trust without the approval or consent of another party. The benefits granted by the trust are at the disposal of the grantor. 

• The grantor may borrow assets from the trust interest-free without the need to put up security. In addition, the grantor may substitute assets named in the trust for other assets of equal value.

• The grantor may add charitable beneficiaries to the trust at any time.

• Income from the trust may be used to pay life insurance premiums for the grantor or the grantor’s spouse. 

• The grantor may serve as a trustee, or a trustee may be appointed by the grantor. The trustee is responsible for managing the corpus and income of the trust, carrying out any duties named within the trust and handling all paperwork regarding the trust. In the event of the grantor’s death, the trust contains a contingency plan that will govern how it is handled afterward. 

Advantages of a Grantor Trust
Grantor trusts have a number of advantages over traditional trusts. One of the greatest advantages is that the assets named in the trust are not subject to the judgments of probate courts. Upon the death of the grantor, the trust is considered a separate legal entity that is to be governed according to the trust’s contingency plan. Since the beneficiaries do not have to wait for probate court rulings, they may immediately be granted the benefits of the trust. Avoiding probate court also reduces the cost of administrating the trust.

Tax Professionals' Resource