Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Grantor

What it is:

In the legal world, a grantor is a person or entity creating a trust.

How it works (Example):

A trustee is a person or entity that has a fiduciary duty to another person or entity, called the beneficiary. The trustee holds cash, assets or title to property for the benefit of the beneficiary. The trustee's job is to appropriately manage the assets in the trust and ensure they are disbursed in the best interests of the beneficiary on behalf of the grantor.

Trusts and grantors of those trusts are often involved in a variety of situations, particularly those relating to personal estates. In the business world, companies often involve trustees in debt offerings, mergers and other situations involving two parties, a large amount of money, and conditions under which the money moves between the parties.

For example, let's assume Company XYZ issues $100 million of bonds. Company XYZ, the grantor, will appoint a trustee, usually a large bank or similar entity, to act on behalf of the bondholders. The trustee receives and distributes interest payments to the bondholders, maintains lists of the bondholders, and performs similar duties on their behalf. The trustee also monitors Company XYZ's compliance with the covenants and communicates with the bondholders when the issuer is not in compliance.

If the bonds have a sinking fund (which is a requirement to set money aside periodically to repay the bonds), the grantor, Company XYZ, will be required to make payments to the trustee during the bond term. The trustee would then use the funds to repurchase some or all of the bonds on the open market.

Why it Matters:

Trusts and the grantors that create them play an important role for businesses and individuals. In many cases, grantors appoint trustees to make sure that assets held on behalf of individuals are not misused. However, companies also have similar wishes in some situations.

As mentioned earlier, the trustee's job is to act in the best interests of the beneficiary. This responsibility is called fiduciary duty, and the trustee is legally obligated to uphold this duty. If it fails to do so, it could be legally liable for damages even if the grantor approves of its actions.