Interested in creating a trust?
Having an estate plan to protect your assets and ensure your loved ones are safe and secure is always a good idea.
When deciding on estate planning tools and strategies, you’ll likely consider setting up a trust for particular property and assets. After all, trusts allow assets to avoid probate, creditors, and even specific tax implications.
There are a variety of trusts to choose from to best suit your individual needs. Generally, what is known as a grantor trust is what many are drawn to when creating their estate plan. But what exactly is a grantor trust? What are the grantor trust rules, and why is this type of trust beneficial?
If you’re ready to plan for the future in Baldwin County, an experienced estate planning attorney can help you create a strategy that involves setting up a trust for your heirs.
Revocable Trust Vs. Irrevocable Trust
The primary purpose of any trust is to set aside property or funds for those assets to be automatically designated to the named beneficiaries. This prevents those assets from being subjected to the probate process after the grantor passes away.
One important factor in creating a trust is deciding whether or not you’d prefer to keep control over your assets, along with having the option of dissolving the trust at any point throughout your life.
Before detailing all of the aspects that make a grantor trust so enticing, it is important to understand the difference between an irrevocable and revocable trust.
Irrevocable Trust: Relinquish Control but Protect Assets
Some trusts—like irrevocable trusts—also keep assets preserved and protected from future creditors or divorces of both the grantor and the trust’s beneficiaries. This is because the assets in an irrevocable trust are under the complete ownership and control of the trust itself—not the person who created the trust.
Those assets are no longer considered part of the grantor’s estate, so the grantor has no control over or access to the assets.
Revocable Trust: Keep Control But Lose Protections
While the grantor relinquishes total control of the assets in an irrevocable trust, revocable trusts allow them to keep complete control. They can change beneficiaries, add and remove assets, and even wholly dissolve—or “revoke”—the trust.
With revocable trusts, however, the trust assets are still under the grantor’s control and are considered part of the grantor’s estate. This means the trust assets are subject to estate taxes and creditors when the trust’s grantor dies.
This is why some people choose irrevocable trusts for estate tax purposes to ease the tax burden of their heirs when the time comes for them to inherit.
So, What is a Grantor Trust?
A grantor trust is a living trust that is defined by the ability of the person who created the trust—also known as the “grantor,” the “settler,” or the “trustor”—to keep certain powers over the trust and the assets in it. The IRS tax code stipulates a set of the grantor trust rules that establish the grantor’s powers in making changes to the grantor trust status.
Are All Grantor Trusts Revocable Trusts?
At this point, you might be wondering if grantor trusts are the same as revocable trusts and vice versa? Not exactly.
The truth is, while all revocable trusts, by definition, are considered grantor trusts, grantor trusts have some characteristics and benefits of both revocable and irrevocable trusts.
Grantor Trust Rules for Controlling Trust Assets
The grantor trust rules of the Internal Revenue Service (IRS) allow the creator of the grantor trust to control and change certain aspects of the trust, similar to a revocable living trust.
The grantor can:
- Make changes to named beneficiaries
- Borrow funds from the grantor trust
- Pay for life insurance premiums with trust assets
- Swap, add, or remove grantor trust assets
Grantor Trusts for Income Tax Purposes
Another similarity between traditional revocable trusts and grantor trusts is that any trust income gained at the end of the year is considered the grantor’s taxable income. This means that the grantor is responsible for paying income tax on the gains at their individual income tax rate.
This represents one of the big tax advantages of revocable trusts, along with grantor trusts since the taxable income gained in trusts jumps to a higher tax bracket faster than an individual’s annual income.
Conversely, irrevocable trusts are considered separate entities for income tax purposes. While the assets in an irrevocable trust avoid estate taxes, the trust has its own tax identification number and needs its own income taxes filed yearly.
Intentionally Defective Grantor Trust (IDGT)
Certain irrevocable trusts can be considered grantor trusts strictly for income tax purposes. These trusts are called “intentionally defective grantor trusts.” The grantor pays income taxes on the trust’s income every year at their individual income tax rate. However, the trust assets are not part of the grantor’s estate, so they can avoid estate taxes when the grantor dies.
Call a Knowledgeable Baldwin County Estate Planning Attorney
Planning for the future can be stressful, worrisome, and complicated. You want your wishes to be known and your loved ones to be taken care of when you’re gone. With so many estate planning tools out there, it’s challenging to know which route to take.
That’s where an experienced estate planning lawyer can help. A skilled trust attorney understands the grantor trust rules and tax implications and how they will apply to your trust regarding gift tax, income tax, and estate tax purposes.
Schedule a consultation with our knowledgeable team of legal professionals, and we’ll ensure your estate plan meets your needs and honors your wishes for the future.