Are you the trustee of a grantor trust? Wondering what happens to the trust in the unfortunate event of the grantor’s death? We explore here.

What is a grantor?

The grantor (also known as the settlor, trustor or trust maker) is the person who creates the trust. Grantors have the responsibility to decide upon the type of trust desired, appoint a trustee, name the intended beneficiaries, and properly transfer assets to the trust. Depending on the type of trust selected, the grantor may designate herself trustee to retain control over the income and assets of the trust during her lifetime.

The Basics: Revocable Grantor Trust vs. Irrevocable Grantor Trust

What is a revocable grantor trust?

A revocable trust (aka, a “living trust”) is one that goes into effect once the document is signed. In other words, the grantor creates the trust and gives the trustee immediate responsibility for managing the assets during their lifetime.

What happens when the grantor dies?

Upon the grantor’s death, the assets are included in the grantor’s taxable estate, the trust becomes irrevocable and the assets pass to the beneficiaries according to the trust’s terms.

What is an irrevocable grantor trust?

An irrevocable grantor trust is one where the terms cannot be altered, amended, or revoked. In this trust structure, the grantor permanently gives up ownership of any assets transferred to the trust. This is a special type of trust that includes provisions to maintain grantor status for income tax purposes.

The property is no longer part of the grantor’s taxable estate. The grantor is liable for any income tax the assets might generate during their lifetime, because such trust is grantor status for income tax purposes.

What happens when the grantor dies?

Still the assets are not included as part of the grantor’s taxable estate after the grantor’s death. Although technically a grantor may serve as a trustee of their irrevocable trust, most lawyers strongly advise against it because it could expose the grantor or estate to tax liability, defeating the primary benefit of this type of trust.

7 procedures to follow when irrevocable grantor dies

There are certain procedures that need to be followed in the event of the grantor’s death. This includes:

• Notification of death- The executor must notify the trustee and beneficiaries of the grantor’s death. This includes obtaining a certified copy of the grantor’s death certificate.
• Trust administration- To access the specific instructions for trust administration, utilize the trust document. According to the terms outlined in the trust agreement, the trustee will take over managing and distributing the trust assets.
• Inventory of trust assets- Essentially, all assets the grantor owned or controlled at the time of their death need to be accounted for. This includes real estate, investments, bank accounts and personal property.
• Notifying creditors- Creditors will need time to make claims against the trust for any remaining debt owed by the grantor. It is recommended that the trustee publish a notice to creditors.
• Asset valuation- As trustee, you might need to acquire professional appraisals to assess the fair market value of certain assets. This is particularly important if the trust requires equal distributions to beneficiaries.
• Settling taxes and debts- Prior to distributing assets to beneficiaries, the trustee should settle any outstanding debts which might include taxes owed by the trust or the grantor.
• Asset distribution- The terms of asset distribution should be outlined in the trust document. The trustee can then distribute the trust assets to the beneficiaries as soon as all debts and taxes are settled.

Wondering if you’re meeting all the necessary procedures when a grantor dies? Contact us.