Legal and financial documents often use terms that are vaguely familiar or used in other contexts to mean something very different from their meaning in the document you are reviewing. If you are in a position to analyze a legal financial document, it is important that you understand it clearly and do not mistake the meaning of key terms. Familiarize yourself with these three commonly misunderstood terms, grantors, guarantors, and trustees, and gain confidence in your ability to read and understand important documents in your life.
Before diving into the deeper aspects of these terms it may serve to look at the legal definitions of each:
- Grantors – the party who transfers title in real property (seller, giver) to another (buyer, recipient, donee) by grant deed or quitclaim deed.
- Guarantors – a person or entity that agrees to be responsible for another's debt or performance under a contract if the other fails to pay or perform.
- Trustee – a person or entity who holds the assets (corpus) of a trustee for the benefit of the beneficiaries and manages the trust and its assets under the terms of the trust stated in the declaration of trust which created it.
With those definitions in mind, let’s examine each in more depth.
Any time real estate or other real property is transferred from the owner to another person, the person conveying the property to the new owner is the grantor. A grantor may be an individual, a business organization, or a trust. In the context of a trust, the concept can become confusing. The trust itself may be a grantor in that it transfers ownership of property in the trust to a new owner, for instance, if real estate held in the trust is sold. However, the person who creates the trust is also known as the grantor of the trust. That is, the creator of the trust grants legal authority or property to the trust.
Grantors also appear in other legal contexts. A quitclaim deed is a common deed used to transfer property that makes no warranty of the grantor’s validity of authority to transfer the title. It grants the same rights the grantor had to the new owner. This is common when there is some uncertainty about the title.
A general warranty deed guarantees the grantor has the authority to transfer the property and provides assurances that the property title comes with no restrictions.
- In a court order, the grantor is the plaintiff in a suit.
- In an abstract of judgment, the grantor is the judgment creditor.
While some documents, especially real estate deeds, clearly spell out who the grantor is, other documents might have the grantor listed in the description of the sale. In any case, knowing the grantor is important in transfer of real property, in examining a trust, and in many other documents.
It can be helpful to understand a guarantor by first examining the concept of a guarantee. In financial terms, a guarantee is a promise – made by the guarantor – that a debt or other obligation will be paid if the original borrower is unable or unwilling to make good on the loan. The guarantor is the person or organization who accepts the responsibility to see that the debt is satisfied.
A guarantor is usually sought to bolster the lender’s confidence that a loan will be repaid and so make them willing to extend the loan to the borrower. If the borrower does not have sufficient credit standing to acquire the loan on their own, they may seek a guarantor. Additionally, if the borrower does not have sufficient assets to secure the loan, a guarantor may be asked to co-sign the loan.
The guarantor usually plays no role in the loan after it is secured. Only in the event that the borrower is unable or unwilling to repay the loan does the lender then seek out the guarantor to take up the debt obligation.
In order to help ensure that the borrower does not willingly walk away from the debt obligation, lenders usually prefer close relatives or friends for loans to individuals. From the guarantor’s perspective, taking on the risk of someone else’s debt would likely only be assumed for someone very close to them.
The trustee plays an interesting role in administering a trust. Once the grantor has set up the trust, a trustee is appointed to make decisions for the trust that are in the best interest of the beneficiaries.
In the case of a revocable living trust, the trustee and the grantor are usually the same person, as long as the grantor is alive and capable of making decisions to administer the trust. After the grantor has passed away or become incapable of administering the trust, a successor trustee steps in to continue making the decisions on behalf of the beneficiaries.
It is important to note that the trustee is expected to make decisions that are in the best interest of the beneficiaries, even if those decisions go against the wishes of the beneficiaries. The trustee’s duty is to see that the decisions made are those that, in the estimation of the trustee, create the most benefit for the trust and by extension for the beneficiaries of the trust.
For that reason, the trustee must be a person the grantor trusts to act with honesty and with sound judgment at all times. A trustee is often the same as the grantor, but may also be a close friend, a spouse, one of the grantor’s children, or a trusted third party. In many cases, the trustee cannot benefit financially from the trust themselves. In fact, the trust must specifically state that a trustee may benefit in order for them to do so.
Trustees are appointed to oversee many different kinds of trusts including bankruptcies, to administer charities, administer pension or retirement plans, or trust funds.
Keeping these terms straight will help you keep from misunderstanding important documents and give you greater control over your financial affairs.