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What Is a Grantor Trust for Tax Purposes

Non-settling trusts pay taxes on the income received, which is usually higher than individual rates. The settlor is treated as the owner of a part of a trust in which the settlor (or a non-detrimental party) has the power to revoke ownership of the assets of the settlor`s trust. So you set up a trust as part of your estate planning. But do you know how the income from the trust is taxed? And how does the American Taxpayer Relief Act of 2012 (ATRA), which raised income tax rates and added the new Net Capital Gains Tax (NIIT), affect the taxation of trusts? Like most irrevocable trusts, the IDGT is created by the settlor by making an irrevocable gift to the settlor`s beneficiaries, usually the grantor`s children and grandchildren. The typical purpose of a trust is to create a vehicle that allows the settlor to preserve the assets it accumulates in a trust that provides asset protection to its beneficiaries, minimizes the final tax burden on beneficiaries, and keeps assets out of the settlor`s taxable estate upon death. The 1986 Act eliminated this benefit by compressing the list of rates for trusts so that the maximum tax rate would be applied to very low income thresholds. With respect to the settlor`s rules, the settlor of a trust is treated as having all the powers or interests of his or her spouse. Prior to the 1986 Act, taxpayers and their advisors were careful to avoid the “trap” of the Constituent Trust, but with a major reversal, it is now the opposite.45 The objective is no longer to circumvent the rules of the Settling Trust, but to examine them carefully. Being classified as a settling trust once entailed a significant burden: increasing progressive income tax rates.

Today, the vast majority of tax outcomes are improved by classifying a trust as a settling trust. In a revocable living trust, you appoint yourself or someone else as a trustee. You then transfer the assets to the trustee`s property to manage them. Since the trust is a revocable living trust, you can change the terms at any time or terminate the trust. To avoid the inclusion of inheritance tax, settlors will most likely want to use the powers of the grantee, so the trust is not considered for income tax purposes, but also does not result in the inclusion of wealth in the settlor`s gross refunds for federal tax purposes. A large-scale repeal of the Settling Trust Rules would certainly cause an uproar within the estate planning community.57 Taxpayers who relied on the settling trust rules to set up IMDGTs would be significantly harmed by the repeal of the rules and the resulting tax increase for their trusts. By definition, IDGTs are irrevocable, so the damage to their estate plans is irreversible and incurable. A: A testamentary trust is created by a will that begins its existence with the death of the person making the will when the property is transferred from the deceased`s estate. Testamentary trusts are generally simple or complex trusts. A testamentary trust is by definition irrevocable because it occurs with the death of the donor […].