What Is A Revocable Trust
With a revocable trust, you are the grantor of the trust or the owner. The money is in the trust, separate from your assets, but you can make changes to the trust and withdraw funds at any time.
In a revocable trust, you are the trust maker, also known as the trustor or grantor. But with a revocable trust, you are likely the trustee too or the person who handles all aspects of the trust. This includes tracking the income and reporting it to the IRS for tax reasons.
You can remain a trustee if you are of sound mind. You may also name a successor trustee to take over when you are no longer able to make decisions. You can change beneficiaries, remove assets, and make other financial changes to the trust throughout your lifetime.
This also means youre responsible for reporting all income and deductions on your personal tax return. For example, if you put your stocks in the trust and then you sell them for a capital gain, you must report the capital gains on your tax returns and pay the applicable taxes, either short-term or long-term gains taxes.
This could increase your tax liability as its added to your individual tax return since you can make changes to the trust.
A Living Trust Provides Certainty And Peace Of Mind
When drawn up correctly, a living trust sets out a clear plan to deal with all of your assets. This can help prevent you from unintentionally disinheriting someone, can help you provide care for a loved one with special needs into the future, and even protect assets from certain people.
All of these things can give you peace of mind now, knowing that your estate will be handled exactly as you wish later. The existence of the trust can also provide certainty and comfort to your loved ones during an already stressful time because you’ve laid everything out for them.
How Does A Beneficiary Get Money From A Trust
Beneficiaries get moneyofficially known as distributionsfrom a trust in one of three basic ways:
- Outright distributions: receive the funds in a lump payment or two, with no restrictions
- Staggered distributions: receive the funds over a certain time period or at periodic intervals, often in a set sum each time or after a specific event, such as graduation from college, reaching the age of majority, becoming a parent
- Discretionary distributions: receive the funds in amounts and at times determined by the trustee often in accordance with the grantor’s instructions and stated wishes
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One drawback of gifting appreciating assets into a grantor trust is that the assets will retain the tax basis you, as the grantor, had right before you gifted the assets. This means that since the assets are no longer a part of your estate when you die, the assets you transferred to the grantor trust will not receive a step-up in basis to what their value is at that time. Capital gains taxation occurs when the trustee or beneficiary sells the appreciated assets. The capital gains tax at the state level ranges from 0% to 13.3%, while the federal rate ranges from 0% to 20% .
How Do I Set Up A Living Trust
If you need help putting a house into a trust and youd like to set up a living trust, we can help. Over the past decade, weve helped 1,000s of clients set up all matters of living trusts, wills, powers of attorney, and estate plans. Wed be happy to answer any questions you have about whether a living trust is the right estate planning option for you. Just give us a call today at to schedule your complimentary consultation.
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Request A Free Consultation
Discuss Your Situation With An Attorney On The Phone
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Work With Us To Complete Your Living Trust
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How Do I Get Started Setting Up An Irrevocable Trust
The first step is to contact one of the attorneys in our estate planning department. We will send you some background information and an initial questionnaire to get you started with the process. We will then set up a time to meet to discuss your family circumstances, specific estate planning goals, and tax issues.
Is There A Way To Qualify Gifts To A Trust For The Annual Exclusion
Yes. In order to make a gift to a trust qualify for as a present interest gift, the beneficiary must be given the right to withdraw the transferred funds for a specified period of time after the gift is made. This right to withdraw the funds is often referred to as a Crummey Withdrawal Right . Beneficiaries must be notified of this right to withdraw each time a transfer is made to the trust in order to ensure that the transfer qualifies as an annual exclusion gift.
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Does The Trust Need To File Annual Income Tax Returns
Yes. Trusts are separate legal entities and are required to file annual income tax returns. Generally, if income is not distributed to the beneficiaries, it is reported by the trust. If income is distributed to the beneficiaries, it is reported by the beneficiaries. However, trusts are often designed as grantor trusts, which require the grantor to report all income earned by the trust on the grantors individual return. This provides several benefits: it doesnt erode the amount the grantor has gifted to the trust, thus allowing the trust to stay as fully funded as possible it allows the grantor to pay the tax at the grantors tax bracket, which is often less than the highly compressed trust tax brackets and it allows the grantor to sell assets to the trust without recognition of gain.
Can I Make Gifts To The Trust That Exceed The Annual Exclusion Amount
Yes. In addition to the gift tax annual exclusion amount, each person may make tax-free gifts throughout his or her lifetime, or upon death, up to the gift and estate tax exemption amount. People who have stock or real estate that they believe will appreciate significantly often make larger gifts to the trust to not only remove the asset from their taxable estate, but also to remove all of the future appreciation.
Strategies To Avoid Capital Gains Tax
Assuming one of your goals for establishing the trust is to pay as little tax as possible, there are a few ways to avoid capital gains taxes inside a grantor trust.
As the grantor, you retain the power to take trust assets back by buying them with cash or replacing them with other assetslow-appreciation ones are ideal. For example, if you receive a large amount of your employers publicly traded stock, you might swap these shares for other publicly traded securities of equal value that have appreciated. Since the assets traded must be equal in value, there should not be a change to your estates value used for calculating estate taxes. After the trade, you will own the highly appreciated stock, but there will be no taxable gain when you die since you will receive a step-up on the basis.
Similarly, for grantor trusts containing appreciated real estate, an IRC §1031 exchange allows for capital gains taxes to be deferred when swapping one real estate investment property for another.
Another strategy to reduce or eliminate capital gains taxes inside a grantor trust is to establish a charitable remainder trust . The grantor can sell investments without being subject to capital gains taxes, receive income for the life of a beneficiary of the trust and obtain a partial tax deduction. Heres how this would work.
Grantor, an executive of a publicly traded company, donates $1,000,000 in his employers stock to a CRT.
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Depreciate Costs Over Time
Depreciation is the incremental loss of an assets value, generally due to assumed wear and tear. As a real estate investor that holds income-producing rental property, you can deduct depreciation as an expense on your taxes. That means youll lower your taxable income and possibly reduce your tax liability.
Youre allowed to take the depreciation deduction for the entire expected life of a property .
For instance, maybe you purchase a home you intend to rent out. The value of the building itself is $300,000. If you divide that value by the 27.5 year expected life of the dwelling, you can deduct $10,909 in depreciation each year.
Once you sell, though, be prepared to pay the standard income tax rate on the depreciation youve claimed. This requirement is known as depreciation recapture, which you can avoid if you pursue other tax strategies, like a 1031 exchange .
Pro tip: Ask your accountant about depreciating major improvements youve made to your investment properties, such as installing a new roof.
Q: What Are Testamentary And Inter Vivos Trusts
A: A testamentary trust is created by a will, which begins its existence upon the death of the person making the will, when property is transferred from the decedent’s estate. Testamentary trusts are generally simple or complex trusts. A testamentary trust is irrevocable by definition, as it comes into being at the death of the grantor. A living person creates an Inter Vivos trust during that person’s lifetime. An Inter Vivos trust can be established as revocable or irrevocable. An Inter Vivos trust can be a simple, complex, or grantor trust depending on the trust instrument.
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Q: What Is A Trustee/fiduciary
A: The trustee obtains legal title to the trust assets and is required to administer the trust on behalf of the beneficiaries according to the express terms and provisions of the trust agreement. A fiduciary is an individual or organization charged with the duty to act for the benefit of another. A trustee is a fiduciary.
Top 5 Benefits Of A Living Trust
The “living trust” has become an increasingly popular estate planning tool because of the many benefits it offers.
About 20% of Americans now have living trusts as part of their estate plans. Perhaps you’re wondering whether you should, too.
First, we’ll talk about what a living trust is and what it does, and then we’ll get into the benefits of a living trust so you can better decide if you should be among that 20%.
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Tax Benefits Of Transferring A House Through A Trust
Moving your house or other assets into a trust can decrease your taxable estate. For a wealthy estate that could otherwise be subject to a state or federal estate tax, putting assets into a trust can help avoid or minimize the estate taxes. Estate taxes generally apply only for estates worth millions of dollars.
Will My Income Taxes Change If I Create A Revocable Living Trust
There are no substantive income tax advantages in the use of a Revocable Living Trust. You are treated as the owner of the Trust for income tax purposes, and must report all Trust income on your personal return under the Grantor Trust income tax rules. The Trust uses your social security number, and the same annual 1040 tax return is filed as long as you file jointly and the Trust holds no foreign property.
According to the Internal Revenue Service:
Grantor Trusts are not recognized as separate taxable entities, because under the terms of the Trust, the grantor retains one or more powers and remains the owner of the Trust income. In such a case, the Trust income is taxed to the grantor, whether or not the income is distributed to another party.
Generally, as a grantor, the only way you can avoid taxation on the income from the Trust is to give up control and benefits of the assets that you assign to the Trust, and give up the right to revoke or amend the Trust. The Trust would then be characterized as an Irrevocable Trust or a Non-Grantor Trust. The Trustee would manage the Trust, and the income from the Trust would be taxed to the Trust. The Non-Grantor Trust has its own taxpayer identification number and must file Form 1041 to report yearly income and deductions.
If a Non-Grantor Trust makes distributions to a beneficiary, those distributions will be considered taxable income to the beneficiary. Lets look at a quick example.
Once I Set Up A Trust How Do I Actually Transfer Assets To The Trust
To transfer cash or securities, the trustee will open an account in the trusts name, and the grantor will instruct his or her bank or broker to move the funds from his or her account to the trusts account. For real estate, a deed is used to transfer legal title of the property from the grantor to the trust. All future insurance and property tax statements should be sent to the trustee and paid with trust funds. Finally, to transfer an existing life insurance policy, the grantor simply needs to obtain and complete a change of ownership form and change of beneficiary form from his or her life insurance company.
How To Pass On Business Assets While Paying As Little In Taxes As Possible
Jim Farmer is Managing Partner of Financial Strategies Group, a leader in the insurance industry providing clients with practical solutions.
When it comes to your financial legacy, business owners and executives who accumulate a significant amount of their net worth in their companys stock rely on the current tax law stating that the basis in assets left to heirs is stepped up at death, to the fair market value as of the date of death. For example, if you held stock that was valued at $500,000 when you received it and is now worth $3 million, your heirs would pay no capital gains tax if they sold the stock for its current value.Last year, a proposal to eliminate the step-up in basis narrowly escaped being included in President Bidens The American Families Plan. Then, earlier this year, as a part of the presidents 2023 budget proposal, another attempt was made to end the step-up in basis for those with capital gains greater than $5 million .
While these attempts have been unsuccessful so far, for many business owners and others who have accumulated illiquid wealth, the survival of the step-up in basis does not mean that all of their assets receive a step-up. Most notably, assets held in an irrevocable grantor trust may not enjoy a step-up in basis for generations.
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What Are The Tax Benefits Of Establishing An Irrevocable Trust
Generally, if you make a gift of an asset to a beneficiary during life, the asset is not included in your taxable estate at your death. An irrevocable trust provides an alternative to simply giving an asset to a beneficiary in order to reduce your taxable estate. With a trust, you can set the timing of distributions as well as the reasons for distributions . Therefore, if your estate is close to or in excess of $2 million, including life insurance proceeds, and you are not comfortable making outright gifts to beneficiaries, you should consider setting up an irrevocable trust to take advantage of the substantial estate tax savings such a trust offers.
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Purchasing An Investment Property For Tax Purposes
There is no denying that real estate can hold a number of tax benefits. One idea that circulates around every now and then, is whether investors should purchase property to tap into these benefits. After all, rental property owners property tax deductions and other benefits can be significant. However, if your sole aim is to achieve deductions or offset other investments, you most likely should not purchase an investment property for tax purposes. There are numerous components to real estate investing, buying a property without a full understanding the market or financing will almost certainly end poorly.
If you are interested in making an investment and want to select a strategy with certain tax benefits, real estate is one option to consider. Again, there are numerous factors of a real estate transaction. Read up on the basics of real estate investing before you decide to purchase a property, and consider how the opportunity aligns with your financial goals.