United States Trust Law - The "three Characters" in The Play - The Settlor/grantor

The Settlor/grantor

Strictly speaking, the Grantor of a trust is merely the person creating the trust, usually by executing a trust agreement which details the terms and conditions of the trust. Such a trust can be revocable or irrevocable. A revocable trust is one in which the settlor retains the ability to alter, change or even revoke the trust at any time and remove funds from it at any time. It is sometimes also referred to as a grantor trust. See below. Unlike under older common law rules, the Uniform Trust Code presumes that all trusts are revocable unless the terms of the trust specifically state otherwise. Generally, the Grantor is also the one charged with funding the initial assets into the trust, either through an instrument (i.e., deed, security certificates, accounts retitled into the trust's name) or by a declaration (i.e., for tangible personal property without a formal title).

From both a historical and practical perspective, trusts have generally been designed to have only one Settlor or Grantor. This is due to the complications that can arise, particularly in non-community property jurisdictions, in determining the nature of property deposited into the trust and the proportionality of the multiple grantors' contributions within it. However, a growing trend for husbands and wives is to create "joint trusts" where both are "grantors" of the trust, thus mirroring the familiar concept of joint tenancy ownership.

For a revocable trust, the grantor retains the power to direct transactions for the trust, even if a third party serves as the trustee. This may even include situations where there may be a conflict in the grantor's direction and the actual terms of the trust. In an irrevocable trust, there has developed a growing use of a so-called trust protector. This is generally an unaffiliated, third party (often a lawyer or an accountant) who is granted the power to amend or change the terms of the trust in order to accommodate unexpected changes in tax or fiduciary law, unexpected changes in the trust's circumstances or other contingencies. The Code permits the use of such third parties to amend or alter even an irrevocable trust. The trustee is to act in accordance with such powers unless "the attempted exercise is manifestly contrary to the terms of the trust or the trustee knows the attempted exercise would constitute a serious breach of a fiduciary duty that the person holding the power owes to the beneficiaries of the trust." Furthermore, the Code assumes such trust protectors act in a fiduciary capacity and must act in good faith with respect the trust's purposes and the best interests of the beneficiaries.

The term "grantor trust" also has a special meaning in tax law. A grantor trust is defined under the Internal Revenue Code as one in which the federal income tax consequences of the trust's investment activities are entirely the responsibility of the grantor or another individual who has unfettered power to take out all the assets. Unlike other trusts, the grantor trust completely passes through all income tax consequences of transactions inside the trust and the trust itself is a virtual shell. This is generally favorable in the current tax climate since in most cases less income will be taxed when a trust is treated as a "grantor trust."