Who is the grantor of a trust?
According to the IRS, a grantor trust is one in which the grantor, i.e. the person establishing the trust, retains control over trust’s income and assets. With this type of structure, the income from the trust is taxed to the grantor, not the trust itself.
Is a grantor trust a tax haven for wealthy people?
As a result, a grantor trust is not the type of tax haven for wealthy people that it once was before the IRS made changes to it. However, grantor trusts are still used today because they have characteristics that might be beneficial to the grantor, depending on their income, tax, and family situation.
What happens when a grantor trust becomes irrevocable?
With an irrevocable trust, the transfer of assets into the trust is permanent and cannot be undone by the trust grantor. Once a grantor trust becomes irrevocable, the trust is responsible for paying taxes on income generated by its assets. There are numerous types of grantor trusts you can establish for estate planning.
What are the pros and cons of a grantor trust?
On the pro side, the primary advantage of including a grantor trust in your financial plan is the potential to preserve wealth while minimizing taxes for your heirs. Typically, you’re better off from a tax perspective when paying income tax on trust assets at your own personal tax rate, versus allowing the trust to be taxed.
Can a grantor trust be a reporter of income?
Grantor trust status can apply to either a revocable or an irrevocable trust. Under the general rule, the trust serves as an information reporter. The trust must obtain its own taxpayer identification number (TIN). However, income is not reported on the trust’s Form 1041.
What happens to a grantor trust’s tax basis at death?
If the grantor wants a trust asset’s tax basis to be “stepped up” at his death, then it will be necessary to trigger grantor trust status in a way that causes the asset to be treated as part of the grantor’s gross estate for estate tax purposes, so that the asset’s tax basis will be stepped up at the grantor’s death.