When we are educating on trusts and the use of trusts in estate planning, people often get a concept confused. There is a difference between a grantor trust and a non-grantor trust. Simply stated, a grantor trust still remains in the grantor’s Social Security number, and a non-grantor trust will obtain a separate tax ID number and file separate trust tax returns.
We will typically use grantor trusts for asset protection trusts and revocable living trusts.
However, we often use a non-grantor trust for VA purposes as well as for estates that have a federal estate tax problem. Currently, a person has a federal estate tax problem when their estate is greater than $11.4 million and for a married couple $22.8 million. It is very rare in our practice to use non-grantor trusts, which require separate tax ID numbers and pay at higher trust tax rates, because not a lot of veterans are doing planning where they have to or want to give up complete control of their assets, and not a lot of estates are big enough to need federal estate tax planning.
In those situations where we use grantor trusts, we intentionally put language in the trust so that is included in the person’s estate, as well as for income tax purposes. We include this language because we want to get a step-up in basis at the death of the decedent, and we also want the parent or client to pay the income taxes, because generally retired clients have a lower income tax than the children who are still working.
There are a lot of other factors that go into what type of trust should be used and under what circumstances, but this provides a basic understanding of the difference between grantor and non-grantor trusts. If you would like to learn more about these and other trust concepts, I invite come to one of our free in-house workshops to learn. We would be more than happy to assist. Just call our office or go to our website to enroll in a workshop at a date and time which is convenient for you.