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What to know about grantor trusts

Michigan residents and others who are looking to protect their assets may benefit from creating a trust. Assets inside of a trust are generally off-limits to creditors, and beneficiaries may be limited in how they use money or other items distributed from it. A grantor trust is a type of living trust that allows the creator to retain control of assets titled in the document's name. As the assets are still under the grantor's control, income is taxed to that person instead of to the trust.

A revocable living trust is perhaps the most common type of grantor trust, but there are other types that a person can choose from as well. For instance, it may be possible to create a grantor retained annuity trust (GRAT). Those who create a GRAT will be able to gain access to any revenue generated by assets in the trust for a certain number of years.

Once the annuity period runs out, the assets are transferred directly to a beneficiary. As a general rule, the use of grantor trusts is ideal for anyone who is looking to minimize the amount of tax that beneficiaries will eventually have to pay. However, an individual who creates a grantor trust must possess adequate financial resources to pay any taxes that come due.

While a living trust may be beneficial for many people, it's important to understand as much as possible about them before creating one. A lawyer may go over the details of creating a trust, such as how much it might cost to do so. An attorney may also provide more information about how to terminate a grantor trust if an individual wants or needs to.

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