Grantor Trust Rules
Candlefocus EditorIn general, the grantor takes an active role in the trust's management. The grantor controls the trust funds, can make changes to the trust agreement, make distributions to beneficiaries, and even revoke the trust. Revocable grants allow the grantor to retain control of the assets and income to the extent that he is held liable for taxes due on them.
Trusts can also be irrevocable. In an irrevocable grantor trust, the grantor relinquishes control of the trust funds, though distribution of the trust's assets remains within the grantor's control. This arrangement is advantageous for both the grantor and the beneficiaries because the grantor can transfer assets that are not subject to gift or estate taxes, while the beneficiaries can enjoy the earnings of the trust without being taxed on it.
An intentionally defective grantor trust (IDGT) is a type of grantor trust created to maximize tax benefits. In this arrangement, the grantor must pay taxes on any income generated, but the assets are not part of the grantor's estate and are excluded from his taxable estate. IDGTs are ideal for sophisticated estate planners, as they allow for efficient transfer of wealth with low tax liability.
Grantor trust rules can be complicated and require professional advice. Estate planners should be consulted to ensure that trust funds are managed properly and to determine the type of grantor trust best suited to their needs. Grantor trusts can be an effective planning tool to avoid estate taxes, but they require careful management. If the grantor fails to follow grantor trust rules, he or she may be liable for unexpected taxes or delays in distributions to the beneficiaries.