12 Feb Is a Grantor Trust the Best Choice for Your Family?
by Scott Rutherford
Many people find themselves doing a balancing act during the estate planning process: While they want to minimize tax liabilities and reduce, or at least limit, time that the estate spends in probate, they also want to ensure that they can spend their last years independently and comfortably.
Grantor trusts are one way that individuals and couples can ensure that the generational wealth they’ve built remains accessible during their lifetimes while also ensuring the quick and efficient settlement of their estate after they die. Grantor trusts are a type of living trust, and there are several categories of grantor trusts to choose from, each with its own advantages and drawbacks.
Trusts and Living Trusts
Trusts are commonly used in estate and financial planning as a way to provide a sum of money or other property for the benefit of another person while assigning the management of the property or money to someone else. The person who provides the money or property for the trust, known as a “trustor” or “grantor,” transfers the funds or property to a beneficiary, but appoints a trustee to hold and manage these funds under terms set by the trustor.
You may be most familiar with trusts that are established to manage and disburse assets to minors or individuals who are judged to not be capable of managing their own finances. What you may not know, however, is that there are other ways to create trusts during your lifetime. In fact, many people opt to use trusts as a way of ensuring their own financial security while maximizing the inheritance that their heirs receive while avoiding delays in disbursing funds and closing their estate.
Wills, Probate and Living Trusts
If you are like most people, you want to create an estate plan that demonstrates your values, as well as your love and care for your heirs. You want your estate settled quickly, with funds and property distributed in accordance with your wishes. You also want to minimize any legal fees, court costs, and taxes.
Even if you have a solid, up-to-date will, your estate will still have to go into probate as it is managed and settled by your executor. This can delay the time it takes for beneficiaries to receive their bequests. Establishing a living trust is one way that you might be able to bypass probate and unnecessary costs.
A living trust is established while you are still alive. You direct assets to be transferred to the trust, which are then held for your beneficiary or beneficiaries. The beneficiaries do not yet have access to these assets, however, as they are managed by a trustee in accordance with your wishes. This allows you to have use of your assets and any income generated from them while you are still alive. After you die, the trust is not subject to probate, because it already belongs to the beneficiaries subject to the terms of the trust.
Your living trust is managed by a trustee or co-trustees. While you can appoint anyone you wish to be the trustee of your living trust, including yourself. It is also possible to appoint yourself and a spouse as co-trustees. When you retain control over a living trust as your own trustee, your trust is considered a grantor trust.
Grantor trusts allow you to maintain control over your living trust while still alive and able to make sound decisions. In some cases, grantor trusts are revocable, allowing you to end or modify the trust if your circumstances change. An irrevocable trust cannot be changed or modified by you after it has been created, which could possibly create financial hardship later on. However, an irrevocable grantor trust may offer certain tax advantages that might offset these risks.
One aspect of a grantor trust is the necessity of appointing a successor trustee. The successor trustee takes over the management of the trust after you become incapacitated or die. After you pass away, the successor trustee continues to manage the trust in accordance with your wishes: This may mean immediately distributing the assets to the beneficiary or beneficiaries or continuing to manage the trust according to your instructions.
Learning More About Grantor Trusts
As is true of many estate planning strategies, grantor trust rules can be complex. If you think you want to incorporate living trusts of any kind into your estate plan, you might benefit from speaking with a registered wealth advisor at Gratus Capital.