Estate planning, just like everything today, is analogous to car buying—or if you prefer—cereal. There are sometimes so many options that consumers are overwhelmed by the options they have and sometimes go with products that do not meet their needs sufficiently. This blog post focuses on a few definitions that are essential to the client decision process.
Q: What is a grantor trust?
A: “Grantor trust” is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust’s income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All “revocable trusts” are by definition grantor trusts. An “irrevocable trust” can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. 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.
Q: What are irrevocable/revocable trusts?
A: An irrevocable trust is a trust, that, by its terms, cannot be modified, amended, or revoked. For tax purposes, an irrevocable trust can be treated as a simple, complex, or grantor trust, depending on the powers listed in the trust instrument. A revocable trust may be revoked and is considered a grantor trust (IRC § 676). State law and the trust instrument establish whether a trust is revocable or irrevocable. If the trust instrument is silent on revocability, then most states consider the trust revocable.
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.
At King Law, there are attorneys throughout North and South Carolina who handle these types of cases and can represent you in this unique situation. Call our toll-free number at 888-748-KING (5464) to request a consultation with one of these experienced attorneys.