The grantor, or settlor, is the individual who sets up a trust. The grantor appoints a trustee, and includes in the trust document instructions for how the trust assets should pass to the beneficiaries. The grantor must retitle assets in the name of the trust, which can hold cash, investments, real estate, valuables and businesses. If the trust generates and retains income, then it pays taxes; if it passes income to beneficiaries, then the beneficiaries must report that income and pay the appropriate state and federal taxes.
Payment of Medical Expenses
A trust may pay medical expenses for a beneficiary. With an irrevocable trust, the grantor must give specific instructions in the trust document on how the trustee is to pay expenses. A medical provider may also allow a trust to become the "responsible party" for an individual patient's billing. This would be a useful arrangement for an individual with a severe or ongoing disability who has few resources of his own to meet medical expenses. In a "special needs" trust, the grantor specifically dedicates trust assets to medical care, rehabilitation, physical therapy and other services for a disabled individual. This means a public agency deciding on a beneficiary's eligibility for a means-tested benefit program will not consider the trust as "available" assets.
The grantor of an irrevocable trust gives up control over the trust assets. He may not change the trust or its terms. A grantor may place more assets into the trust, but may not contribute to the trust in order to meet trust obligations. If the beneficiary of a trust incurs a medical bill, for example, the grantor should not make a gift to the trust to cover that bill, or give instructions to the trustee on which bills to pay. This would represent direct control over trust assets by the grantor.
Beneficiary Withdrawal Rights
Contributions to a trust may subject the donor to IRS gift taxes; however, there is a gift-tax exclusion as of 2014 of $14,000 a year, as long as the contributions are available for withdrawal by a beneficiary -- for medical expenses, for example. The beneficiaries must be notified of this right, according to the IRS rules. A grantor may use the trust document to designate which beneficiaries are eligible to make withdrawals, and limit the withdrawals as well. However, if the contributions exceed the withdrawal rights, then the gift tax comes into play, and the donor must file a gift tax return for the year he made the contribution.