Can a grantor be a trustee?

The Irrevocable trust is one of the most valuable tools for estate planning and Florida asset protection that is available. These trusts are not only a great way to pass assets outside of probate, but also allow assets to be protected from creditors. For an irrevocable trust to be valid, a person or entity must serve as the trustee, or manager, of the trust. The Trustee is a person who is responsible for accounting and managing the trust’s assets for the beneficiaries of the trust. Naturally, a question our firm often receives is can I (the grantor/creator of the trust) serve as the trustee?

Can a grantor be a trustee of an Irrevocable Trust? The now outdated school of thought was that a grantor should never serve as the trustee because it could potentially make the trust’s assets available to the grantor’s creditors – thus defeating the asset protection benefits offered by an irrevocable trust. The belief came from section 2036 of the tax code, which states any trust where the grantor retains the right to possess or enjoy the property or designate who will possess and enjoy the trust property will make the principal of the trust includable in the grantor’s estate at death for estate tax purposes.

Thus the theory was that if the grantor serves as a trustee, he or she would retain enough control of the trust’s assets to have these assets included in his or her own taxable estate. However, this theory is unfounded because someone who was once the grantor and now trustee has the same duties and obligations as anyone else that would serve as trustee. (In a minority of states not including Florida, a Grantor may still not be the sole trustee of an irrevocable trust and retain asset protection)

A grantor acting as a trustee has all the same fiduciary obligations as any other trustee. The trustee is bound to act by the terms of the trust and the fiduciary duties expected of all trustees. His or her role as the grantor ends once the assets are transferred to the irrevocable trust. He or she no longer owns the assets as these assets have been irrevocably transferred to the trust. The trust is then deemed to be a legal entity that owns these assets.

Recent case-law nationwide has shown the growing trend of courts allowing grantors to serve as trustees without risking the assets of the trust to the creditors of the grantor. One exception to this rule is that the grantor serving as a trustee cannot retain any right to the income from the trust. This income will be deemed to be money that is transferred back to the grantor, and thus will be deemed available to grantor’s creditors.

A properly drafted irrevocable trust will allow a grantor to serve as a trustee without violating his fiduciary duties or making the assets liable to creditors. In many cases, the assets of a trust become liable because the grantor/trustee acted in a manner which violated the terms of the trust in favor of the trustee rather than the beneficiary. A court would rule these actions to be fraudulent, regardless of it the trustee was the grantor of the trust.

The trust code has significantly changed in the past 15 years. For instance, today only two in a thousand Americans have a taxable estate with the rise of the gift and estate tax exemptions. The old trend of prohibiting grantors from serving as trustees is dying as a growing number of jurisdictions throughout the nation are allowing it. For more information on the benefits of an irrevocable trust for estate planning and asset protection, contact the Law Office of David Goldman PLLC today.