The legal term grantor refers to an individual or entity that bestows ownership of property, an easement, or a right, on another individual or entity. The term is often used when one party transfers or conveys title to real property by deed, or when an individual creates a trust, and transfers ownership of his assets into it. To explore this concept, consider the following grantor definition.
Definition of Grantor
- A person or entity that grants something
- A person or entity that gives or bestows something, or that grants a right
1620-30 Anglo-French grantor
What is a Grantor
The verb “grant” means to convey something, or to give possession or title of something to another. The noun “grantor” has the specific meaning of a person (or entity) that grants, bestows, or awards something. As a legal term, the word grantor is commonly used in relation to an individual who creates a trust, and conveys ownership of certain assets to the trust, and in the creation of certain legal documents, such as a Grant Deed. The grantor is always the person or entity giving away certain property or rights to another. The recipient of such property or rights is called a “grantee.”
A grantee is the individual or entity named to receive assets or property bequeathed or left to them. A grantee may also be referred to as a “beneficiary,” which term is commonly seen in wills, trusts, and life insurance policies.
While an individual who creates a trust and transfers his assets into it is referred to as a grantor, a “grantor trust” is actually a legal entity created to hold and control an individual’s assets. While all trusts have a grantor, as well as a trustee and beneficiaries, it is the relationship between the grantor and the other parties that determines whether a trust is a grantor trust or a non-grantor trust.
In a grantor trust, the grantor keeps certain powers over administration of the trust, as well as the assets inside the trust. For example, the grantor in such a trust maintains the ability to make changes or amendments to the trust, and to revoke or terminate the trust. A grantor trust does not have its own tax identification number (“TIN”), as the grantor reports income and deductions related to the trust on his personal income tax return.
Although a grantor trust is typically revocable, meaning that the grantor maintains the ability to revoke or terminate the trust, it becomes irrevocable immediately upon the grantor’s death. At this time, the trust must be administered according to the terms outlined in the trust document, by the named trustee. No changes can be made to the trust after the grantor has died.
For example, Sophia creates a grantor trust, transferring the title to her home and her car into it, as well as several investment accounts. For the next 23 years, Sophia maintains control over the trust and assets, moving investment funds in and out of the trust several times. Upon Sophia’s death, however, the trust becomes irrevocable, so assets can no longer be moved in or out of the trust, nor can the terms of the trust be changed.
Irrevocable Grantor Trust
A revocable grantor trust can be changed or amended by the grantor at any time, with or without permission from the beneficiary. An irrevocable grantor trust, on the other hand, cannot be altered without the consent of both the appointed trustee and all of the beneficiaries. In creating an irrevocable grantor trust, the grantor not only gives up control of the trust, but also over the assets placed into it. In doing this, the irrevocable grantor trust becomes a separate entity for tax purposes, and the assets funded into the trust are forever removed from the grantor’s estate.
There are several benefits to the creation of an irrevocable trust, the first of which is to avoid probate court. In addition, moving assets permanently into a trust eliminates the grantor’s burden of paying income taxes on those assets, and reduces the amount of estate taxes due when the grantor dies. Both of these tax benefits help ensure the beneficiaries receive an undiluted inheritance.
Another important consideration in creating an irrevocable trust is that, once valuable assets have been placed in the trust, they are no longer available to creditors who may want to seize or place liens on the grantor’s estate. Assets typically placed in an irrevocable trust include such items as cash, coins, real property, life insurance policies, investment assets, and businesses.
Intentionally Defective Grantor Trust
An intentionally defective grantor trust (“IDGT”) is a trust created for the purpose of obtaining certain estate tax benefits, increasing the value of the assets at the time the beneficiaries inherit them. Such a tax strategy is commonly used in an irrevocable trust in which the grantor forever gives up his right to, and control over, assets placed into the trust. This effectively removes these assets from the grantor’s estate, and therefore from income and estate taxes that would ordinarily apply.
An intentionally defective grantor trust makes use of an intentional “flaw” in the trust’s provisions that prevent the IRS from seeing the assets as having been removed from the grantor’s estate. This means he continues to pay income tax on those assets as they grow in value. This is typically accomplished by selling such financial assets as bonds, notes, and other assets that are expected to grow steadily in value, for a specific period of time, usually 10 to 15 years, receiving a note in return. The IDGT must make payments on the note, including an interest rate that classifies the loan as “above market,” while the assets appreciate at a speedier rate.
Because the grantor continues to pay income taxes on the assets in the IDGT, the beneficiaries of the trust will inherit the appreciated assets, with no income tax having been deducted over the years. An intentionally defective grantor trust is a complex estate planning tool, for which it is important to obtain the assistance of a qualified wealth management professional or estate planning attorney.
Related Legal Terms and Issues
- Asset – Anything owned or controlled by a person or company that is expected to have value
- Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
- Creditor – A person or entity to which money is owed by another person or entity.
- Entity – An individual, company, association, trust, or other organization that is legally recognized in the eyes of the law. A legal entity is able to enter into contracts, take on obligations, pay debts, be sued, and be held responsible for its actions.
- Grantor – A person that creates a will, trust, or who transfers interest in real property to another
- Grantee – A person that receives an interest in real property according to a deed.
- Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
- Probate Court – The section of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.