The trustee, which again can be yourself, is responsible for managing assets in the trust on behalf of its beneficiaries and your wishes. Since the trust is revocable, you can change its terms or terminate it altogether at any time.
A grantor retained annuity trust or GRAT is a type of irrevocable trust which allows you to draw income from your assets. You transfer assets to the trust and receive annuity payments from it for a set number of years. Once this annuitization period ends, any remaining assets in the trust would go to its beneficiaries.
A qualified personal residence trust or QPRT is an estate planning tool that can be used to reduce taxes. This kind of trust allows you to transfer ownership of your primary home or second home to exclude its value from your taxable income. A QPRT might make sense if you have a home of substantial value that you want to pass on to future generations on a tax-advantaged basis.
An intentionally defective grantor trust is another type of irrevocable trust. It treats you as the asset owner for income tax purposes but not for estate tax. The assets exist separately from your estate when you pass away. This type of trust can help minimize estate and gift tax liability for wealthier families. While the trust is irrevocable, its grantor trust status offers more flexibility than a revocable living trust.
On the pro side, the primary advantage of including a grantor trust in your financial plan is the potential to preserve wealth while minimizing taxes for your heirs. With certain types of grantor trusts, such as those mentioned earlier, you can get into more specific tax strategies for sheltering assets, such as a home.
If a grantor retains a reversionary interest in property transferred to a trust, then he is taxed on the capital gains attributable to the reversionary interest. The capital gains are taxed to the grantor because they are deemed to be accumulated as part of the trust corpus for future distribution to the grantor.
Example 4 : G transfers property for the benefit of his son, S, who is 8 years old at the time. The trust agreement further provides that the trust will terminate when S dies and at that time, the trust corpus will revert back to G.
G is taxed on any capital gains realized by the trust. Example 5 : Same facts as the earlier example, except that, under the terms of the trust agreement, capital gains are allocated to trust income rather than to corpus. Now G will not be taxed on any capital gains realized by the trust. General Rule. Example 6. There are a number of exceptions to the general rule that a grantor is treated as the owner of a trust if he can affect the beneficial enjoyment of the trust corpus or income.
Power to Apply Income to Support a Dependent. A power to distribute trust income to support a beneficiary whom the grantor is legally obligated to support does not cause the trust to be treated as a grantor trust, except to the extent that the income is in fact used for such purpose. Power affecting Beneficial Enjoyment only after the Occurrence of an Event. To determine whether this criterion is met, it is necessary to determine the prevailing interest rate, and then go to the applicable IRS Tables under the regulations.
However, after the stated event has occurred e. Power exercisable only by Will. A grantor will not be treated as the owner of a trust based on a power to affect beneficial enjoyment if the power is exercisable only by Will, except for a power to appoint accumulated trust income by Will if the trust provides for the mandatory or discretionary accumulation of trust income by the grantor or a non-adverse party.
Example 8 : Grantor creates a trust and gives an independent bank trustee the power to accumulate income or pay it currently to the beneficiaries. Grantor retains a testamentary power to appoint any accumulated income among the beneficiaries. The bank is an independent trustee but is a non-adverse party. Power to Allocate Among Charitable Beneficiaries. Example 9 : Grantor creates a trust that provides that the income is payable to specified educational institutions, but the grantor retains the ability to allocate income among those institutions.
Power to Distribute Corpus Limited by a Standard. Power to Withhold Income Temporarily. A grantor will not be treated as the owner of a trust based on a power to distribute or apply income to any current beneficiary or to accumulate the income if the accumulated income must ultimately be paid to one of the following:.
Power to Withhold Income during Minority of Disability. A grantor will not be treated as the owner of a trust merely because the grantor or a non-adverse party holds a power to distribute income or to accumulate income and add it to principal during a time when the income beneficiary is under 21 years of age or is under a legal disability.
Furthermore, income withheld during such periods need not ultimately be payable to the income beneficiary or his or her estate. It can be paid to whomever the trust names as recipient of the trust principal. An independent trustee may be given fairly broad powers over beneficial enjoyment without causing the grantor to be treated as the owner.
The grantor is treated as the owner of a trust if he possesses certain administrative powers which are exercisable for his benefit rather than the beneficiaries.
The existence of such powers may be determined either from the wording of the trust instrument or from the way in which the trust is actually operated. Categories of Administrative Powers. The prohibited administrative powers fall into four 4 basic categories. General Rule : The grantor will be treated as the owner of any part of a trust in which the grantor or a non-adverse party has the power to revest title to trust assets in the grantor.
In other words, if the grantor or a non-adverse party has the power to revoke any part of a trust and reclaim the trust assets, then the grantor will be taxed on the trust income. Power to Revoke Held by a Non-adverse Party. Similarly, the grantor will be treated as the owner of a trust if the grantor holds a power of revocation even if that power can only be exercised with the consent of a trustee who has no economic interest in the trust.
Power to Revoke with the Consent of an Adverse Party. Power to Alter, Amend or Terminate. The regulations clarify that a power of revocation will trigger grantor trust status, even if it is not described as such. General Rule : The grantor will be treated as the owner of any portion of a trust if the income from the trust is or may, in the discretion of the grantor or a non-adverse party be:.
This rule applies whenever income is distributable by the grantor, his spouse, or a non-adverse party without the consent of an adverse party. Distribution of Income. The grantor will be treated as the owner of the trust if the trust income is, or can be:. Accumulation of Income.
The grantor is taxed in the current year, even if he must wait for an extended period of time before obtaining access to the accumulated income. Example G creates a trust and under the terms of the trust agreement, the trust is to accumulate income for 10 years, and then at the discretion of the grantor or a non-adverse trustee may be distributed to the grantor.
Payment of Insurance Premiums. Exception — Unfunded Trusts. The grantor will not be taxed if the grantor did not transfer any income producing property to the trust.
So, most life insurance trusts that are not funded with assets other than an insurance policy ordinarily do not trigger the grantor trust rules. Power to Withdraw Principal or Income. The holder will only be treated as the owner if he can exercise the withdrawal solely by himself and without consent or approval of any other persons.
So, for example, if a trust beneficiary owns a withdrawal power that can only be exercised with the consent of his spouse, parents, or children, the beneficiary will not be treated as the owner of the assets. Partially Released Withdrawal Powers. This rule prevents a beneficiary from ending his deemed ownership of a trust by releasing a withdrawal power while still retaining a significant degree of control over the trust assets.
A way to achieve this is for the grantor to retain a power of revocation over the trust assets or retain an ongoing right to trust income.
Any grantor trust power should suffice when including this into your estate planning. So, for example, the grantor might be inclined to incorporate into the trust deed, a power on the part of a non-adverse party other than the grantor to borrow against corpus or income without adequate interest or without adequate security. An issue that will frequently arise when real estate is used to fund a trust is the issue of realty transfer tax.
However, the drafting of such a trust deed necessitates a working knowledge of the applicable Realty Transfer Tax laws applicable to different states. The trust continues to report in the same manner as before the grantor died.
The are various reason for setting up a grantor trust, but the following reasons are common:. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.
Not automatically. Only if it falls within the grantor trust rules. What Is A Grantor Trust? What Is A Grantor? Identifying The Grantor The grantor of a trust is the person settlor who provides property or other funds to the trust that forms part of the trust corpus assets.
Multiple Grantors A trust can have more than one grantor. Foreign Grantors If a foreign person is treated as the owner of the trust under the grantor trust rules, and the trust has a U.
Grantor Vs Grantee A grantor differs from a grantee. Grantor Vs Trustee Trustees are individuals or companies that hold and manage the assets for the benefit of a trust and its beneficiaries while a grantor is the owner. Pros And Cons Of Grantor Trusts The primary advantage for estate planning is the potential to preserve wealth and minimize taxes for your heirs. Retained Interest Trusts This is a trust where a grantor makes an irrevocable transfer of assets but reserves the right to receive income or enjoyment of those assets for a period of time.
Qualified Personal Residence Trust QPRT This trust allows you to transfer ownership of your primary home or secondary home to it and exclude that value from your taxable income. What Are Grantor Trust Rules? Beneficiaries Grantors have the discretion to change the beneficiaries of the trust. Revocable As long as a grantor is deemed mentally competent, they can change or terminate the trust if needed.
Changing The Trust The grantor is also free to relinquish control of the trust and make it an irrevocable trust. Trust assets are included for estate tax purposes.
Avoiding Realty Transfer Tax An issue that will frequently arise when real estate is used to fund a trust is the issue of realty transfer tax. The are various reason for setting up a grantor trust, but the following reasons are common: Asset protection and wealth preservation; Credit protection; Avoiding probate; Reduce or eliminate estate taxes; and To gain some tax benefits or tax deferral benefits.
Who pays tax on grantor trust? If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor Is a family trust a grantor trust? What makes an irrevocable trust a grantor trust?
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