A grantor trust is a living trust in which the creator of the trust, the grantor, retains powers over the trust. Because a grantor trust is a living trust, this means the trust takes effect during the lifetime of the individual who created it—the grantor. A grantor trust is a great tool many individuals choose to pursue. It allows the grantor to preserve his or her wealth that he or she has accumulated in a trust. Additionally, it provides protection of assets for their beneficiaries, minimizes the tax burden to the beneficiaries, and keeps the assets out of the grantor’s taxable estate at death.
An important feature of a grantor trust is its ability to protect assets in the trust. A grantor trust does this by sheltering the assets in the trust from the grantor’s possible creditors in the future as well as children’s creditors or divorces, if such circumstances apply. These types of trusts are advantageous especially where the grantor’s primary objective is to protect personal or business assets from lawsuits or risks of liability. A grantor of the trust, for income tax purposes, is treated as the owner of the trusts and the assets held within the grantor trust. Because of this, the trusts income is taxed directly to the grantor as if they received the trust income directly. The benefit of this is that the assets held within the trust can continue to grow and the burden of paying income tax out of the trusts assets is no longer an issue. Since the grantor is paying the tax but the trust is receiving the income, it is very important that the grantor have the resources, other than the trust, to pay the tax that is generated by the tax income. While this is a large benefit of a grantor trust, there are of course some disadvantages. However, these disadvantages may be extraordinarily outweighed in the eyes of many individuals with the advantages such a trust entail. One disadvantage is the fact that at some point, the potential sale of a highly appreciated asset may no longer be financially feasible for the grantor to continue to pay the tax. For this reason, having the necessary means to pay the generated tax income in the grantor trust is vital.
The most important takeaway from grantor trusts is that they allow for great flexibility. This can be extremely important for some individuals and their current life situations. If you think a grantor trust is right for you or wish to find out more, contact an estate planning attorney for more information.
