What Is a Grantor?
A grantor is an individual or other entity that creates a trust (i.e., the individual whose assets are put into the trust) regardless of whether the grantor also functions as the trustee. The grantor may also be referred to as the settlor, trustmaker, or trustor.
A grantor can also refer to the seller, or writer, of either call or put options contracts who collects the premiums for which the options are sold. Options are sold through exchanges to option holders who are responsible for the payment of the premium.
- A grantor is the entity that establishes a trust and legally transfers control of those assets to a trustee, who manages it for one or more beneficiaries.
- In certain types of trusts, the grantor may also be the beneficiary, the trustee, or both.
- A grantor may also refer to an options writer, who earns a premium when they sell options contracts.
Understanding Grantors: Trust Creators
The grantor is the person who creates a trust, and the beneficiaries are the persons identified in the trust to receive the assets.
The assets in the trust are supplied by the grantor. The associated property and funds are transitioned into the ownership of the trust. The grantor may function as the trustee, allowing him to manage the property contained therein, but it is not required. If the grantor is the trustee, the trust is referred to as a grantor trust. Non-grantor trusts are still funded by the grantor, but control of the assets is relinquished, allowing the trust to function as a separate tax entity from the grantor.
What Are Trusts?
Trusts are designed to hold money, investments, or property for various purposes. Different types of trusts—testamentary trusts, living (inter vivos) trusts, revocable trusts, irrevocable trusts, and more—protect assets in different ways.
Trusts can facilitate a smooth and speedy transfer of assets upon death, eliminate probate costs, minimize estate taxes, and ensure that the settlor’s assets are used in the way intended. For example, a trust can allow a parent to make sure a child doesn’t squander an inheritance. Trusts also let the settlor decide, at a time when he or she is fully mentally capable, what would happen to his or her assets in the event of mental disability or incapacity.
Understanding Grantors: Options Sellers
Synonymous with "option writer," a grantor creates contracts for selling options for an underlying interest or asset. For example, say a grantor has sold a call option or assumed a short position in a call option. If the call option is exercised, then the grantor has to sell the underlying stock at the strike price.
Conversely, if the grantor sells a put option, the grantor is said to be long and must purchase the underlying stock at the strike price. Serving the function of an option writer is relatively risky, especially on a naked position when the writer does not actually have possession of the asset involved in the contract.
What Are Options Contracts?
Options are contracts that provide the buyer and seller the right, but not the obligation, to purchase or sell a particular asset at a specified price, referred to as the strike price, on a particular date. These contracts are supported by the presence of the underlying asset, which may be composed of a particular stock, an exchange-traded fund (ETF), or other applicable financial products.
The options writer, or grantor, has no authority as to whether the option will be exercised before the contract expires. In cases where a grantor anticipates a loss based on his position, they can choose to participate in a secondary deal with another party designed to offset the risk associated with the obligation.