You may have heard the argument that establishing a trust is better than a last will simply for tax purposes. However, the Internal Revenue Code (IRC) still imposes certain tax implications on trusts. This blog will specifically focus on grantor trusts. So, without further ado, please read on to discover how a grantor trust works and how a seasoned Broward County trust lawyer at The Probate Lawyers can help you determine whether you should look into establishing one.
What is a grantor trust and how does it work?
Put in a basic summary, a grantor trust is one in which you, the grantor, are recognized as the owner of the assets and property held within it. Such recognition is necessary for income and estate tax purposes. That is, the income generated by the assets and property within this trust type may graduate you to the next highest tax bracket. Meaning, you may continue to be subject to higher income tax rates for the rest of your lifetime.
Is establishing a grantor trust the right move for me?
Before, high-net-worth individuals used to use grantor trusts as a means of protecting their wealth from harsh federal and state taxes. But now, the IRC has made changes to how this trust type functions, making grantors still responsible for paying taxes on them. While this may seem like a significantly negative drawback, there are still characteristics of a grantor trust that make it appealing to many. That is, you may be interested in establishing a grantor trust for any of the following reasons:
- These taxes may be better if they are imposed at your income tax rate rather than that of the trust itself.
- You may maintain control over the trust’s assets and property throughout the rest of your lifetime.
- You may modify the beneficiaries of the trust and the portions they are entitled to as you see fit.
- You may dictate a trustee to manage and administer the trust when you are no longer around.
- You may undo the trust at any time so long as you can prove you are still mentally fit.
Understandably, you may still not find the benefits of a grantor trust to outweigh its drawbacks. In this case, you may rest easier knowing that you also have the power to change it into a different trust type at any time. Specifically, you may convert it to an irrevocable living trust, which has its own tax identification number and which will pay these taxes itself.
This blog is just the tip of the iceberg when it comes to estate planning and tax laws in the state of Florida. So for more information, please reach out to a competent Broward County estate lawyer at The Probate Lawyers today.
