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.
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.
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.
- Photo Credit Thomas Northcut/Photodisc/Getty Images
Who Pays Taxes on a Trust?
Two major categories of trusts exist for tax purposes: grantor trusts and non-grantor trusts. The difference depends on whether or not the...
Can an Irrevocable Trust Be a Grantor Trust?
Grantor Vs. Non-grantor Trust; Print this article; ... By definition, all revocable trusts are grantor trusts because the grantor reserves the right...
Does an Irrevocable Trust Need a Name?
Grantor Vs. Non-Grantor Trusts. According to the Internal Revenue Code, ... A valid non-grantor-type trust requires a TIN in the name of...
Grantor Trusts Income Tax Rules
Grantor Vs. Non-grantor Trust. Featured. 6 Ways to Travel on the Cheap. Read Article. 18 Fast-Growing Careers. View Photos. Frugal Cell Phone...
Living Trust Taxes
A living trust, also known as an "inter vivos" trust, is a trust established while the grantor (trust creator) ... Grantor vs....
What Happens If the Grantor of a Trust Dies?
When the grantor of a trust dies, ... Grantor Vs. Non-grantor Trust. Do You Need a Tax ID Number When the Trust...
The Difference Between a Grantor & a Beneficiary
Grantor Vs. Non-grantor Trust. Fiduciary Requirements for Grantor Trusts. Fall Color Coverage: Orange. The Difference Between a Bank Beneficiary & the Executor...
How to Reduce Capital Gains Tax
Use an irrevocable domestic non-grantor trust to shield the capital gains. Contact an estate planner or tax attorney for more detailed information....
What Is a Non-Revocable Trust?
A non-revocable trust is established when the grantor (the person creating the trust) permanently transfers certain assets to the trust. Through the...
Is a Family Trust Better Than a Living Trust?
A trust is designed to meet specific wishes of the grantor, and a family trust is neither better nor worse than a...