There are many different terms used in the context of estate planning and especially in the construction of trusts. When you hear the term grantor trust, you may be curious about whether or not this fits in with your estate plan and what it means. A grantor trust states that the settler or the person creating the trust is responsible for paying income taxes on the income that is earned by that trust.
A grantor trust is a kind of living trust in which the person who creates it retains ownership of the assets and property in the trust for estate tax and income tax purposes. A grantor trust is then taxed at the personal tax rate of the grantor, which is typically lower than potential other trust tax rates.
A grantor trust can be irrevocable or revocable. If the trust is revocable, changes can be made to the assets inside and the trust as long as the creator of the trust is competent to make those changes. A grantor is also able to name a successor trustee to handle the administration of the trust in the event that that person is unable to do so because of mental incapacity or other issues.
The grantor, however, can still remain responsible for taxes due on the trust. There are strict rules related to how a grantor trust must be operated, including the ability of the grantor to change the composition of assets, change or add beneficiaries, subtract or add assets from the trust and who can borrow from the trust. This means it’s very important to work with a qualified estate planning attorney in Virginia Beach, VA to create your own and to recognize how to protect your decision.