A Quick Primer on Trusts

Trusts are powerful tools in estate planning that offer a versatile and effective way to manage and protect assets. Whether you're looking to facilitate a smooth transfer of wealth, reduce tax liabilities, or provide for your loved ones, trusts can be tailored to meet a variety of needs and goals.

By understanding the different types of trusts and their distinctive benefits, you can create a comprehensive estate plan that not only preserves your legacy but also provides peace of mind for you and your beneficiaries. Here is a quick primer on trusts.

Revocable vs. irrevocable trusts

Revocable trusts

• Purpose — These are lifetime planning instruments that outline the disposition of assets held in trust or to be put into trust upon a person’s passing. They are similar to a will, but can also provide benefits during the individual’s lifetime.
• Control — Revocable trusts offer a high degree of control, allowing the plan to be revised at almost any time.
• Tax and creditor protection — Since the assets are still owned by the person, they do not shelter assets from estate tax at death and generally do not offer protection from creditors.
• Primary benefits — Naming a trustee to manage assets should the individual become incapacitated. Also, probate can be avoided upon the individual’s passing.

Irrevocable trusts

• Purpose — Can be created during life or at death. The trust is often funded by a revocable living trust at a person’s death.
• Control — Provides limited to no control once created, with terms generally final. There are usually limited opportunities for revision.
• Tax and creditor protection — Assets are removed from the estate for estate tax purposes, which offers a certain level of creditor protection, as determined by state law.
• Primary benefits — Effective for managing estate tax liability and providing for heirs.

Grantor vs. non-grantor trusts

Grantor trusts

• Taxation — The grantor is treated as the owner for income tax purposes, including the trust’s income in their own annual tax calculation.
• Advantages
  • Tax efficiency — Trusts pay income tax at the maximum rate on income above approximately $15,000 of taxable income. If the grantor pays the tax, the net tax paid may be lower.
  • Reinvestment — The trust does not pay the tax, which allows more funds to be reinvested to grow the trust’s value.
  • Tax-free transactions — The grantor can sell assets to the trust without recognizing income tax on the transaction. One caveat would be if a grantor’s partnership capital account is negative.

Non-grantor trusts

• Taxation — The trust or beneficiary pays the income tax on income generated by trust assets.
• Advantages — Beneficial for certain tax planning strategies and estate management.

How we can help

Effective estate planning requires collaboration among clients, estate planning attorneys, financial advisors, trustees, business operators, and beneficiaries. CLA’s team is available to join your team or help you establish one to define your goals and implement a tailored plan.