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Grantor vs. Non Grantor Trust: What’s the Difference?

There are two main types of trusts: grantor vs. non grantor trust. In this article, we will discuss the differences between these two types of trusts, their different benefits and help you decide which one is right for you.

The Definition of a Grantor Trust

Defining what is a grantor trust is quite a straightforward task. A grantor trust is a type of trust that allows the grantor, or the person who sets up the trust to retain all of the income and tax benefits associated with the trust. This type of trust is generally used for estate planning , as it can allow the grantor to pass on his or her assets to beneficiaries without having to pay any taxes on them.

Benefits of Grantor Trusts

The grantor trust is the most common type of trust. But how does it work?

This trust is set up by the grantor, who transfers assets into it. The grantor can:

  • Change the beneficiaries of the trust
  • Control the investments within it and investment decisions of the trust
  • Undo the trust at any time (which is why grantor trusts are a form of revocable living trusts. A revocable trust is a trust that can be changed and canceled by the owner, originator, or grantor.
  • Borrow from the trust posting collateral
  • Use trust income from the trust to pay life insurance premiums
  • Exchange assets of equal value within the trust with those outside the trust

The Definition of a Non Grantor Trust

A non grantor trust is a type of trust that does not allow the grantor, or the person who sets up the trust, to maintain control over it. The grantor also does not retain any of the income or tax benefits associated with the trust. This type of trust is generally used for asset protection purposes, as it allows the grantor to protect his or her assets from creditors.

How Non Grantor Trust Work

A non grantor trust is any trust that is not a grantor trust and is set up the same way, a grantor transfer his or her assets into in. But in a non-grantor trust the grantor relinquishes all control over the trust and cannot use it for his or her own purposes. That means they’re unable to revoke or change the terms of the trust or make changes to trust beneficiaries.

Instead, the trustee, who is appointed by the grantor, then manages and controls the trust. The trustee is responsible for distributing the assets to the beneficiaries as specified in the trust agreement. The grantor also forfeits all income and tax benefits associated with the trust as the trust is its own tax payer with its own tax identification number (TIN).

The Benefits of a Non Grantor Trust

The main benefits of a non grantor trust is that it offers asset protection and estate planning benefits for the grantors assets.

Grantor vs Non Grantor Trust Main Differences

  • Grantor trusts are controlled by the grantor, while non-grantor trusts are managed by a trustee (established by the grantor).
  • Grantor trusts provide income and tax benefits to the grantor, while non-grantor trusts do not.
  • Grantors can use grantor trust assets for their own purposes, while they cannot do the same with non-grantor trust assets
  • Non-grantor trusts offer an additional layer of asset protection from creditors
  • Grantors of trusts can choose beneficiaries, while trustees of non-grantor trusts select a trustee to be in charge.

Next Steps

In short, grantor trusts provide all income and tax benefits to the grantor, while non-grantor trusts do not. However, it’s important to understand each type of grantor and non-grantor trust has its own characteristics and specific benefits from being tax exempt to asset protection to avoiding the estate tax. If you’re still unsure which type of trust is right for you, check our planning tool, contact our team of experts for more guidance, or check out our content to find the right solution!

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.