March 2016

3 Benefits Of Irrevocable Grantor Trust

Grantor trusts are often used to transfer wealth to family members and future generations in a tax-efficient and advantageous manner. Simply stated, a grantor trust is a trust established by an individual (the "Grantor") with assets held by a person or company (the "Trustee") for the benefit of an individual or entity (the "Beneficiary"). Taxable income and deductions earned by the trust are declared on the Grantor's income tax return. These trusts can be revocable or irrevocable; however this newsletter will focus on the benefits of irrevocable grantor trusts.

There are several variations on the set-up and administration of grantor trusts, however all such trusts irrevocably established for the benefit of a third party offer certain benefits for the Grantor and beneficiaries.

1. A correctly established irrevocable grantor trust allows the Grantor to transfer assets in a manner which protects them from the creditors of all interested parties (including the Grantor, Trustee, and Beneficiary), while ensuring that those assets are utilized for, and available to, the Beneficiary. In certain situations, the Beneficiary can also maintain control over the assets held for their benefit, while still keeping those assets protected from divorce and bankruptcy proceeding and from other creditors who may assert claims against the Beneficiary.

2. A grantor trust also provides a vehicle for the Grantor to transfer property to a Beneficiary without passing along the income tax burden associated with the growth of such property. So long as a trust remains a grantor trust, the Grantor is responsible for all income tax due on the trust property, and receives the benefit of all deductions associated with the same. Therefore, since the payment of income taxes is a requirement, it is not considered an additional gift by the Grantor. This allows the Grantor to further reduce his or her taxable estate by paying the income taxes, while at the same time allowing the trust property to grow uninhibited for the Beneficiary.

3. Finally, even though it may be irrevocable, a grantor trust provides flexibility for future planning and asset transfers. The Grantor can enter into certain transactions with the trust which may produce favorable tax results for the Grantor. For example, the Grantor can later sell assets to the trust without recognizing gain on such sale, or loan money to the trust without incurring income tax liability on the interest income, since a grantor trust is a disregarded entity during the lifetime of the Grantor.

If, in the future, the Grantor decides that he or she no longer wishes to carry the income tax burden associated with the trust, it is usually possible to turn off grantor trust status and convert the trust to a non-grantor trust.