Understanding Grantors: Key Roles, Responsibilities, and Types Explained

Adam Hayes, Ph.D., CFA, brings over 15 years of Wall Street experience as a derivatives trader and financial writer. With deep expertise in economics and behavioral finance, Adam holds a master’s degree in economics from The New School for Social Research and a Ph.D. in sociology from the University of Wisconsin-Madison. He is a CFA charterholder and licensed with FINRA Series 7, 55, & 63. Currently, Adam researches and teaches economic sociology and finance at Hebrew University in Jerusalem.

What Does a Grantor Mean?

A grantor is an individual or entity that establishes a trust by transferring assets into it. Often called a settlor, trustmaker, or trustor, the grantor may also serve as the trustee, managing the trust’s assets. In another context, a grantor refers to the seller or writer of call or put options who collects premiums from buyers through exchanges.

Key Insights

• A grantor creates a trust and legally transfers asset control to a trustee who manages it for beneficiaries.
• Assets placed in a trust are contributed by the grantor, who may relinquish ownership.
• The grantor can also act as trustee or beneficiary, depending on the trust type.
• In options trading, a grantor is an options writer earning premiums by selling contracts.

Grantors as Trust Creators

The grantor initiates a trust by placing assets under its ownership. Beneficiaries named in the trust documents are entitled to receive those assets. While the grantor can manage the trust as trustee, this is not mandatory and may be restricted in certain trusts.

If the grantor is also the trustee, the trust is called a grantor trust. Non-grantor trusts, although funded by the grantor, transfer asset control to another trustee, allowing the trust to be treated as a separate tax entity.

What Are Trusts?

Trusts are legal arrangements designed to hold money, property, or investments for specific purposes. Common types include testamentary, living (inter vivos), revocable, and irrevocable trusts, each providing unique asset protection and management benefits.

Trusts help ensure smooth asset transfers after the grantor’s death, reduce probate expenses, minimize estate taxes, and guarantee assets are used according to the grantor's wishes. They also safeguard inheritances from misuse and provide instructions for asset management in cases of mental incapacity.

Grantors as Options Sellers

In financial markets, a grantor is synonymous with an option writer who creates contracts to sell call or put options on underlying assets. When a call option is exercised, the grantor must sell the asset at the strike price; with a put option, the grantor must buy the asset at the strike price.

Writing options involves risk, especially when holding a naked position without owning the underlying asset. Grantors cannot control if options are exercised but can offset potential losses through secondary transactions.

Understanding Options Contracts

Options contracts grant buyers and sellers the right—but not the obligation—to buy or sell assets at predetermined prices within specific timeframes. Underlying assets can include stocks, ETFs, or other financial instruments.

What Is an Irrevocable Trust?

An irrevocable trust requires the grantor to relinquish control and ownership of assets once the trust is established. The grantor cannot act as trustee, alter terms, or reclaim assets. Though restrictive, irrevocable trusts offer substantial benefits like estate tax avoidance and creditor protection.

How Trusts Protect Against Squandering Inheritances

Spendthrift trusts prevent beneficiaries from rapidly depleting their inheritance by distributing funds in controlled increments over time. These trusts also shield assets from creditors, ensuring long-term financial security.

Call Option vs. Put Option: What’s the Difference?

Call options give buyers the right to purchase an asset at a set strike price, while put options grant the right to sell. Grantors write these contracts, taking on obligations to sell or buy assets if options are exercised.

Final Thoughts

Grantors play vital roles either by funding trusts within estate planning or by writing options contracts in investing. Both roles require responsibility and integrity, though their functions and risks differ significantly.

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