How Does a Grantor Trust Work?

Question:  How Does a Grantor Trust Work?— T. Rodriquez

Answer: A Grantor Trust is a trust in which the person establishing the trust retains enough “ownership rights” or “incidents of ownership” that the person is treated by the IRS as the owner of the trust assets for tax purposes. The right to revoke the trust is sufficient to make the trust a grantor trust.

A living revocable trust is a type of Grantor trust.  It is used in estate planning to avoid probate, help in situations of incompetency, and allow “smooth” management of assets after the death of the grantor or person who established the trust. The trust can be effective in eliminating or reducing estate taxes for married couples. Living revocable trusts are established during the life of the grantor, who retains the right to the income and principal and the right to amend or revoke the trust. When the grantor dies, the trust becomes irrevocable and acts as a substitute for a traditional will.

Such a trust could also be called a loving trust, a family trust etc.   It doesn’t matter the name, if drawn correctly each trust will do basically the same thing.  The important thing is getting your estate planning taken care of.