Grantor vs. Trustee
When dealing with a grantor trust, given the legal, tax, and financial implications, it is essential to have a clear understanding of the various roles within a trust, as well as the duties and responsibilities of each role. Indeed, you may be surprised to know that good teamwork, even within the confines of a trust, often means the difference between everything going smoothly and, on the other hand, friction and outcomes that are not necessarily desirable.
While this article is not an exhaustive resource, it explains the differences between a grantor, trustee, and beneficiary, and the trustee’s duties. There are multiple types of trusts and many terms bandied about, such as a revocable trust or irrevocable trust (and a grantor trust can be either of these) or a revocable living trust. However, we will only discuss the general aspects of trust roles. In addition, as there are many questions surrounding the concept of probate, and while estate planning is a vital topic on its own (not to mention the implications of estate tax), we will not discuss those in this article. Still, we will hopefully lay the groundwork for a better understanding of these topics in future articles.
What Is The Definition Of A Grantor?
Also commonly referred to as the owner, settlor, or trustor, this person contributes property (such as real estate), other funds, or even instruments such as life insurance to the trust. The property and the grantor’s funds become part of the trust corpus (in other words, the trust’s assets). It is crucial to note that a trust can have more than one grantor. For instance, if more than one person funded a grantor trust, they will each be treated as a grantor in proportion to the value of the cash or property they transferred to the trust.
We should also note that the grantor is the person who retains the power to control or direct the trust’s income or assets. This is crucial to understand, especially when dealing with a foreign trust and the income tax treatment surrounding this instrument. Pulling from one of our previous articles, the grantor can also be any person who creates a trust or directly or indirectly makes a gratuitous transfer of property to a trust. If someone creates or funds a trust on behalf of another, they are treated as the trust’s grantors. It’s not only imperative to understand for estate planning but also as it relates to estate tax and, of course, probate, which is a scenario that individuals attempt to avoid by creating an instrument such as a revocable living trust.
What Is The Definition Of A Trustee?
A trustee is a person or entity appointed to administer assets or property for the benefit of a third party, in this case, for a trust. The grantor must designate a trustee to administer the wishes outlined in the trust that will best exercise said grantor’s wishes and maintain asset protection to completion of the transferral or otherwise. As we will discuss later, the grantor and the trust can be the same person.
Difference Between Grantor And Trustee
The differences between the grantor and trustee are numerous. Still, it is essential to point out that trustees are individuals or companies that will be holding and managing assets for a trust and its beneficiaries when the grantor dies. In contrast, the grantor is the person who owns the trust and who appoints the trustee, who specifies the terms of the trust document. As well as someone who has ideally created the trust for purposes such as appropriate financial and tax planning and avoiding probate (which can be accomplished with a revocable trust or irrevocable trust).
There Are Three Elements To The “Trust” Document
While trust documents vary in length and scope, certain elements exist in every basic trust document.
As mentioned previously, this is the person who creates the trust. They will contribute assets to the trust and, with the help of an attorney, write up the trust agreement that will govern the administration of the trust.
The trustee is the person or entity charged with administering the trust in accordance with the terms of the agreement, as set forth by the grantor. The trustee acts as the legal owner of trust assets and is responsible for handling any assets held in a trust. The trustee also typically handles tax filings for the trust and distributes the assets according to the trust document. Whether or not a trustee is paid for their work, they must act prudently in the management of trust property and trust income. If not, they will be liable for breach of trust for failing to exercise proper care, which can lead to the trust fund suffering a loss due to their negligence. Therefore, it is essential to take great care in appointing a trustee, as this is not something they should do flippantly. If a trustee dies or becomes incapacitated, a successor trustee will generally take over this role.
Accountability of trustee
Although a trustee has far-reaching powers, they may not simply do whatever they want. The law enforces strict obligations and rules for a trustee to follow, such as accounting for any benefits they might have acquired from a trust, whether directly or indirectly. This goes even beyond fraudulent abuse of position by a trustee.
Duty of Trustee is to obey trust document for benefit of beneficiaries
Building upon the previous point, we must never forget that a trustee is required to obey the stipulations of the grantor trust document for the specific benefit of the beneficiaries. A trustee’s responsibilities are often disclosed in the trust document, and any power not explicitly given cannot be exercised, with certain narrow exceptions. Again, that the trustee has a duty to carry out the trust following its exact terms.
Fiduciary relationship of trustee
We often hear the term “fiduciary” when discussing estates and trusts. In this case, the role of fiduciary means that one is held to high standards in protecting a trust’s investments and distribution. Specifically, the trustee has to obey the directions of the trust document for the benefit of the beneficiaries.
The Trustee Can Have No Private Advantage
What do we mean by “private advantage” here? Simply put, a trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust. For instance, in a case where a trustee is a professional trustee, and the trust specifically provides a right to make reasonable charges for services rendered, the trustee may do so. However, fully disclosure of the basis and amount of charges will be required. Another aspect of private advantage is that a trustee is not permitted to use or deal with trust assets for private direct or indirect advantage. Courts have held trustees personally liable to account for breaches of the trustee’s obligations. If appointed as a trustee, they must always remember this crucial point.
The Trustee Must Have The Best Interests Of The Beneficiaries
It seems very obvious to mention that trustees must exercise all their powers in the best interests of the trust’s beneficiaries. The trustee is obligated to have the highest duty of loyalty to the beneficiaries in order to administer the trust solely with the best of intentions, putting aside their own personal gain. At no point can there be conflicts of interest, and if there are any to arise, it must be fully disclosed immediately.
The Trustee Must Act Prudently And Is Under Fiduciary Duty To Do So
Related to the previous point, the trustee has a duty to protect and preserve the trust property. They must also defend the grantor trust and the beneficiaries against anyone who would challenge the trust’s validity or seek to appropriate the trust’s assets. Something also important to mention, but may not be self-evident, is that the trustee must make the trust’s assets productive. What does this mean? The trustee must act prudently or sensibly when investing, acquiring, selling, and managing the trust’s assets. Therefore, as mentioned previously, the trustee is also generally responsible for handling the tax return for the trust. Therefore, appropriate income tax planning for both the trust and the beneficiaries is one of a trustee’s responsibilities. It is clear that a trustee’s duties are numerous and, given their great importance, should not be taken lightly.
While we have mentioned beneficiaries many times in this article, the general definition of a beneficiary is the individual who will receive distributions from the trust, whether they are a family member or a fellow corporation member of the grantor.
Who Is Considered The Grantor Of A Trust?
After everything we’ve learned about this role, the trust grantor will usually be regarded by the IRS as the person who funds and/or possesses control of the trust.
Can A Trust Grantor Be The Trustee?
Note that the grantor can act as the trustee while they are still alive and of sound mind to maintain total control of the resources.
How Do The Trust, Grantor, Trustee and Beneficiary All Work Together?
Like any good sports team, there has to be good communication, cooperation, and a mutual understanding of the shared goals between the grantor, trustee, and beneficiary, for the orders of the trust document to be correctly applied. In this scenario, the grantor designates who the trustee will be, and the trustee, in turn, will manage the trust’s assets per the terms of the trust document. As a beneficiary, while the trustee cannot withhold trust assets from you (unless specified within the trust document), the grantor sets forth the stipulations for distribution and can give the trustee the power to decide when you receive the payments. Therefore, all parties involved must maintain a good relationship with each other and buy into the understanding that the outcomes specified by the trust document can only become a reality if everyone is working together toward the end goal.