Since there is so much terminology involved with trusts, it is easy to become confused. Many trusts refer to “grantors” and “settlors” and “trustors,” and you may wonder what role these play in your estate planning. The good news is that the basics are very simple: these are actually interchangeable terms. Essentially, these terms refer to the entity or person who created the trust. In essence, the person who holds this role makes all the decisions regarding the trust, including what goes into the trust, who the beneficiaries of the trust are and how the law will disseminate any inheritance from the trust.
What is the difference between a grantor and non-grantor trust?
Most commonly, the term “grantor” refers to who has power over the administration of the trust according to the IRS. In a grantor trust, the grantor continues to hold power over elements of the trust until death. When the grantor dies, the trust automatically turns into a non-grantor trust. Prior to death, the person holding the role of grantor in a grantor trust retains full control of whatever property is in the trust and holds the ability to terminate the trust or change the terms at will. Additionally, the grantor is responsible for informing the IRS of all losses or profits on his or her tax return.
In comparison, a non-grantor trust is where the grantor has given up entire control of the trust. In a non-grantor trust, only the trustee has the power to terminate or revoke the trust. In addition, the grantor cannot hold additional standing in a non-grantor trust: the grantor may not be a beneficiary or a trustee. Typically, in a non-grantor trust, the grantor ceases to benefit from the assets in the trust entirely.
What are the benefits of non-grantor trusts?
The biggest benefit to the non-grantor (or living trust, or inter vivos trust), trust is that they help avoid federal taxes. On the other hand, a grantor, or revocable, trust will not help you avoid taxes, but instead help your heirs bypass probate court. Whether a grantor or non-grantor trust is right for you depends upon your particular circumstances and what you are trying to accomplish with your estate plan. There are a number of potential tax pitfalls to non-grantor trusts, so it is important to work with a professional to ensure you are not unpleasantly surprised.
Additionally, keep in mind the difference between a living trust and a testamentary trust. You create a living trust while you are still alive. A testamentary trust only exists after your death and it is set up by terms in your will. Testamentary trusts are always irrevocable, but living wills trusts are almost always revocable.
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Dealing with estate planning can be very confusing. Not only does it involve terms that are often not used anywhere else, many of the vital roles pursuant to trusts have multiple names, as it does here. Working with a professional can help you get on track to ensure that your estate has the plan it needs without running afoul of excessive federal tax. Contact us today at AmeriEstate to start creating the right trust for your financial needs.