What Is a Grantor?
A grantor is an individual or entity that creates a trust. Their assets are placed into this trust, and the grantor may also function as the trustee, sometimes being referred to as the settlor, trustmaker, or trustor. Additionally, a grantor can refer to the seller or writer of call or put options contracts who collects premiums when these options are sold through exchanges to option holders responsible for premium payments.
Key Takeaways
- A grantor establishes a trust and transfers control of assets to a trustee who manages the trust for beneficiaries.
- The assets in a trust are provided by the grantor, who may give up ownership in some cases.
- In specific types of trusts, the grantor may also be a beneficiary, the trustee, or both.
- In the context of investments, a grantor refers to an options writer who earns a premium by selling options contracts.
Grantors as Trust Creators
The grantor is the architect behind a trust, identifying beneficiaries to receive the assets within. By transitioning property and funds into the ownership of the trust, the grantor lays down the fundamental framework.
A grantor trust signifies that the grantor is also the trustee. In contrast, non-grantor trusts still receive funding from the grantor but relinquish control, functioning as separate tax entities.
What Are Trusts?
Trusts hold money, investments, or property for various purposes including testamentary, living (inter vivos), revocable, and irrevocable trusts. They protect assets and facilitate smooth transfers, estate tax minimizations, and asset usage that aligns with the settlor’s intentions.
Trusts can prevent an heir from squandering an inheritance, allowing parents to safeguard their child’s future finances. They also provide a framework for managing assets if the settlor becomes mentally incapacitated.
Grantors as Options Sellers
In the world of finance, a grantor can be synonymous with an ‘option writer.’ This grantor creates options contracts for underlying assets. When selling a call option, they may need to sell the stock at the strike price if the option is exercised. Conversely, selling a put option obligates them to purchase the underlying stock.
What Are Options Contracts?
Options contracts offer buyers and sellers the right—though not the obligation—to purchase or sell an asset at a specified strike price on a particular date. They are based on underlying assets like stocks or ETFs.
Option writers have no control over whether the option is exercised but can use secondary deals to mitigate potential losses. However, options writing comes with risks, especially in uncovered or ’naked’ positions when the writer doesn’t hold the asset involved in the contract.
What is an Irrevocable Trust?
An irrevocable trust requires the grantor to step aside after its creation and funding. The grantor can’t reclaim the property or change the terms, including beneficiaries. These trusts can’t be revoked or modified.
While restrictive, irrevocable trusts offer advantages such as estate tax exemptions upon the grantor’s death and creditor protection. These trusts thus remain attractive for significant asset holders.
How Does a Trust Prevent Squandering an Inheritance?
A spendthrift trust includes provisions to restrict a beneficiary from accessing their entire inheritance at once, thereby preventing waste. It allocates funds in smaller increments over time, thus limiting immediate access and offering some creditor protection.
Difference Between Call Options and Put Options
Options contracts fall into two categories: call options, granting buyers the right to purchase an asset at a specific strike price, and put options, giving the right to sell at the strike price. Investment-related grantors write or create these options, selling them to collect premiums.
The Bottom Line
There are two kinds of grantors: one who funds a trust for estate planning and might retain control over its assets, and one who works as an investment grantor, writing call or put options. Despite their high level of responsibility, the core duties of each type are significantly different.
Related Terms: trustee, trustor, beneficiary, call option, put option, revocable trust, irrevocable trust.
References
- National Council on Aging. “Living Trust vs. Will: Key Differences”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: An Introduction to Options”.
- Cornell Law School Legal Information Institute. “Irrevocable Trust”.
- New York City Bar Association. “Spendthrift Trust”.
- United States Office of Government Ethics. “Call or Put Option (Written)”.
