Grantor Vs. Non-grantor Trust

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A grantor trust is a trust that can be revoked by the grantor at any time, as long as he is alive and mentally competent. A non-grantor trust, also known as an irrevocable trust, cannot be revoked unilaterally by the grantor. Both types of trust arrangements have advantages and disadvantages.

Revocation and Modification

  • A grantor can revoke or modify a revocable trust simply by notifying all known beneficiaries. Some states require the revocation or modification to be in writing. An irrevocable trust can only be revoked or modified with the unanimous consent of the beneficiaries or by court order, depending on state law. A court may revoke or modify an irrevocable trust without the unanimous consent of the beneficiaries in the interests of justice -- if, for example, the grantor based his decision to create the trust on false information, or if trust property is generating expenses that the trust cannot pay.

Estate Tax

  • The estate tax does not apply to most estates because the annual estate tax exclusion is so large that only wealthy taxpayers are subject to the tax. Although the estate tax exclusion varies greatly from year to year, in 2011 it was $5,000,000, meaning that among taxpayers who died in 2011, only estates worth more than $5,000,000 were liable for estate tax. Nevertheless, if your estate is worth more than the annual exclusion, you can exclude from your estate the value of any property that you place in an irrevocable trust. The assets of a revocable trust are still considered part of your estate for tax purposes.

Asset Protection

  • Once you place assets into an irrevocable trust, they are no longer legally yours. For this reason, the creditors of a grantor generally can't reach irrevocable trust assets. Nevertheless, if you place assets into a trust to avoid an existing creditor (instead of a potential future creditor), the transaction could be reversed if a court believes that your intentions were fraudulent. By contrast, creditors can reach assets placed into a revocable trust, without having to establish fraudulent intent.

Capital Gains Tax

  • Normally, if you own assets that appreciate in value between the time you obtain them and the time you die, your beneficiary will become liable for capital gains tax on the amount of the appreciation as soon as the asset is liquidated. In an irrevocable trust, capital gains tax is not assessed against your beneficiaries. A revocable trust does not offer this advantage.

References

  • Photo Credit Thomas Northcut/Photodisc/Getty Images
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