Grantor trusts

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Grantor Trusts

7/3/11

Most of us are familiar with the idea of a “trust fund”, where an inheritance or insurance settlement is kept “in trust” for a beneficiary. Such a Trust protects the interests of a minor or incompetent person, who cannot by law handle funds on their own, or protects the interests of a person who might be of legal age to handle funds but who lacks the maturity or experience to do so effectively. In these cases it is the trustee’s role to manage and invest the assets, to prepare and file tax returns, and to gently suggest to the beneficiary that while Lamborghini makes wonderful automobiles, a Honda may be more suitable to a young beneficiary’s needs.

Grantor trusts (also called Revocable Trusts or Living Trusts) are less familiar to many of us. In grantor trusts, the same person funds the trust and is beneficiary of the trust (usually receiving all income and retaining full power over the assets). Grantor trusts collapse several traditionally separate roles into one person. What does it mean to hold assets in “trust” if you retain control of those assets? Why would the same person want to be the “grantor” of the trust, the “trustee” of the trust, and the “beneficiary” of the trust?

There are several benefits to Grantor Trusts:

  1. Avoiding Probate. A grantor trust can take on many of the functions of a will, directing the successor trustee (who generally takes over when the grantor/trustee becomes incompetent or dies) how to distribute assets in the trust. If you are careful to fund your grantor trust with all of your major assets, it may not be necessary to admit your estate to probate when you die. By avoiding probate, a certain amount of expense will be saved (although the cost of having a grantor trust drafted and then funding the trust somewhat offsets these savings). Avoiding probate also means keeping the transfer of your property at death more confidential.
  2. Ease of Management. When you serve as your own trustee in a grantor trust, you typically control property in the trust just as you would property in your own name. Should you become incapacitated for any reason, the Trust can specify a successor trustee to take over management of your assets. A trust makes it easier to manage your assets should you become temporarily or permanently incompetent, without the need of having a court-appointed guardian take over your affairs.
  3. Stewardship of Resources After Death. Perhaps you plan to leave some or all of your assets to minors, or to beneficiaries who would benefit from a trustee’s financial guidance. Your grantor’s trust can specify the creation of one or more trusts at your death to hold funds “in trust” for beneficiaries too young to receive funds directly or in need of a trustee’s financial acumen. You may also wish to use a trust if you have assets that you do not wish to be liquidated and distributed in cash at your death (such as farmland).
  4. Tax Advantages. If you and your spouse are worried about either federal estate taxes or Indiana inheritance taxes, trusts can be used to divide ownership of your property between the two of you, which can help prevent all of your property being taxed upon transfer at the second spouse’s death. Federal estate tax laws are constantly changing, so be sure to consult your accountant or attorney about the current state of the law. Keep in mind that unless you have considerable wealth, trusts are rarely worth establishing for tax reasons alone.