Grantor trusts are estate planning instruments that offer a lot more flexibility than the standard instruments of estate planning such as wills. In general, trusts make it possible for you to distribute your assets after you are gone by your wishes. However, for those looking for a little more control over this process than standard trusts offer, grantor trusts might be the best way to go. In a nutshell, grantor trusts allow you to maintain some control over your assets, enabling you to provide an income for a loved one, and so on. In this article, we are going to look at grantor trusts in more detail and explain to you how they could benefit you.
What Are Grantor Trusts?
Grantor trusts are sometimes referred to as self-settled trusts, and there is a good reason for this name. Unlike other trusts where complete control of the assets in question is surrendered Irrevocable trusts), grantor trusts enable you, the estate owner, to retain some degree of control over the assets. The exact extent of the control that you have varies from trust to trust, but in principle, you have a lot more flexibility with these types of grants. The term that is used to describe the degree of control that you hold onto is known as the power of the grantor and could include the following:
- Ability To Revoke the Trust: With grantor trusts, you have the power to completely revoke the trust. What this action does is restore complete control of the assets to your control. There are varying reasons why asset owners may want to do this but if there is a change in circumstances and the asset owner feels they need to take control of their estate once again, grantor trusts make this possible.
- Income distribution: If you want to establish a trust but need to specify who gets some or all of the income that the trust generates, then going from a grantor trust might be your best bet. Some of this income could include interest, dividends, and much more. Grantor trusts give you the flexibility to choose who can get income from the trust’s assets.
- Management flexibility: If you want to put your assets in a trust, but require the power to exchange or sell some assets, the grantor assets give you this flexibility. This is particularly useful if you want to be able to make executive decisions regarding your assets in light of changing financial circumstances. For example, you may wish to sell some of your assets if their market value appreciates, enabling you to increase the total value of your asset portfolio.
Under a grantor trust setup, any income that is earned by the assets may be regarded by the IRS as your taxable income, which means that you may find yourself under tax obligation.
What Are the Types Of Grantor Trusts?
There are several grantor trusts that you can select from. The type that you choose depends on your needs as well as the general estate planning strategy that applies to you. Some of these grantor trust types include:
- Grantor Retained Annuity Trust or GRAT: For people who are looking to enjoy an income from the trust while at the same time pursuing their estate planning strategy, this may be the perfect fit for you. GRAT enables you to enjoy a fixed amount of income every year from your assets for a pre-determined period. Once this time elapses, the assets pass on to the beneficiaries, typically at a discounted value.
- Irrevocable Grantor Retained Income Trust or IDGT: This works exactly like GRAT with one major difference, you are not allowed to take the assets back. Once the trust is established, it cannot be revoked. However, people wishing to shield their assets from tax liability may prefer to go this way. This is because, under IDGT, trust assets are not part of your estate as far as tax purposes are concerned.
- Spousal Lifetime Access Trust or SLAT: This is a trust specifically designed for people wishing to give their spouses a fixed annual income from their estate. In some circumstances, your spouse may even be able to access the principal assets under this arrangement. When your spouse passes away, the trust passes on to other beneficiaries, such as your children.
- Defective Grantor Trust: Here you get some flexibility around what you can do with the assets, but the trust is structured in a way to help avoid tax liabilities. It usually needs meticulous planning and guidance from financial experts and estate planning attorneys.
How Do Grantor Trusts Compare with Other Trusts?
When comparing grantor trusts with other kinds of trusts, one of the key factors at play is control of assets under the trusts versus tax liability. Working with this metric, grantor trusts allow you to have some control over the assets, but this often comes with some tax liability on income generated by the trust. Comparing this with the other kinds of trusts, namely revocable and irrevocable trusts, grantor trusts seem to walk the middle road. With revocable trusts, you have complete control of the assets, but you also have to pay taxes on income generated by the assets. With irrevocable trusts, you have no control over the assets but at the same time, you get to enjoy zero tax liability on those assets.
With this in mind, it is obvious that grantor trusts are ideal for people who want to walk the middle line between revocable and irrevocable trusts.
Benefits Of Grantor Trusts
With grantor trusts, you will be able to tailor the management of your estate to perfectly suit your needs. You get some control over your estate, which enables you to enjoy an annual income from the assets or direct this income to any beneficiary that you choose.
Grantor trusts also make it possible for you to manage some elements of your estate, which makes it easier to take advantage of market conditions to grow your estate. You may be able to sell some assets or exchange them, potentially exploiting favorable market conditions. Grantor trusts make this possible while, at the same time, ensuring that you enjoy reduced tax liabilities that you would face if you were working within a revocable trust.
Ultimately, the choice that you make will depend on your needs. However, if you find this rather confusing, there must be experts who can help you select the right kind of trust. Nevada Trust Company was founded in 1995 and recognized as a top-tier provider of expert trustee and custody services, specializing in asset protection trusts, self-directed retirement services, and comprehensive wealth management solutions tailored to clients both domestically and abroad. Our financial experts will guide you through the process of estate planning, ensuring that you end up with the right grantor trust for your needs.
