Trusts – A general overview

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A trust may be inter vivos or testamentary. The inter vivos (living) trust is a trust agreement executed by the settlor and the trustee during the settlor’s lifetime. In essence it is a type of contract. The settlor is sometimes also called the grantor or trustor. The trust can be funded during the settlor’s lifetime, this means, assets are transferred to the trustee. The trust is then administered by the trustee for the beneficiaries during the settlor’s lifetime, and, if desired, after death. If the trust is unfunded, no assets are transferred to the trust at the time of its creation. Assets are instead transferred to the trust at a later time, such as on the disability or death of the settlor.

What is a testamentary trust?

In contrast, a testamentary trust is written into an individual’s will. It only takes effect on the individual’s death. In consequence, the trust is funded following probate of the will and at some point in the settlement of the estate. The problem with a testamentary trust is that the intended trustee may not want to serve. In contrast, an inter vivos trust ensures that the trustee will serve as a fiduciary. This is because the trustee has the opportunity to review, agree with and sign the trust before the settlor’s death. A testamentary trust does not offer this opportunity. Moreover, a testamentary trust is established during probate and is therefore not private.

How does the IRS classify trusts?

Grantors are considered substantial owners when they retain certain interests and powers. Example: A grantor who retains an unrestricted power to revoke or amend the trust will be considered as the trust owner and will therefore be taxed on the trust income. These trusts are called grantor trusts. All other trusts are non-grantor trusts. A non-grantor trust is a taxable entity where the taxes are allocated between the entity and the beneficiaries according to subchapter J of the IRC. See also: What’s the difference between a grantor and non-grantor trust?

What types of trusts are useful to lower estate taxes if you are above the exemption amount?

A basic revocable living trust does not reduce estate taxes. Estate tax reducing options include the qualified personal residence trust, an irrevocable life insurance trust for death benefits, a grantor retained annuity trust for income generating assets, charitable trusts, and the intentionally deficient grantor trust for appreciating assets.

See also: Comparison of California Wills, Revocable and Irrevocable Trusts

What’s the difference between a grantor and non-grantor trust?

What are Irrevocable Trusts For?

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