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What are the different types of grantor trusts?

On Behalf of | Jan 13, 2025 | Trust Administration

A grantor trust is a specific type of trust that allows you to keep certain powers or benefits over the trust assets. Unlike other trusts, which the IRS treats as separate taxable entities, the IRS considers a grantor trust an extension of you for tax purposes. As a result, you pay taxes on the trust’s income as part of your personal income tax. This can offer potential estate and gift tax benefits, depending on how you use or structure it.

There are several types of grantor trusts, each designed to serve different purposes:

Revocable living trust

As the name suggests, you can revoke or amend it at any time since you are also the trustee. After your death, it becomes irrevocable and helps avoid the probate process. The only drawback is that because you can easily change or terminate a revocable living trust, it cannot protect your assets from creditors.

Intentionally Defective Grantor Trust (IDGT)

This irrevocable trust allows the grantor to pay income taxes on trust assets while keeping the trust outside their taxable estate. This structure is particularly effective for transferring appreciating assets like business interests or real estate.

Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust where the grantor retains the right to receive an annuity for a specified term. If the grantor survives the trust term, the remaining assets pass to beneficiaries free of estate tax. It works best with assets expected to appreciate significantly, such as publicly traded stocks or closely held business interests.

Qualified Personal Residence Trust (QPRT)

A QPRT is specifically for transferring a personal residence to beneficiaries at a reduced gift tax cost. This type of trust allows the grantor to retain the right to live in the home for a specified term. If the grantor outlives the trust term, the home passes to beneficiaries outside of the taxable estate, which can potentially reduce the gift tax value of the home.

Know if it’s the right estate planning tool for you

It’s crucial to remember that while grantor trusts offer many potential benefits, they may not be right for everyone. Consult with an attorney who can help you assess your options.

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