Why Choose a Grantor Trust?
For tax purposes, capital gains, additional income and other taxable events are taxed to a trust. When a trust is established, the trustee typically applies for a separate tax identification number. This means that a tax return is filed for the trust on an annual basis and the income is taxable and payable by the trust (through the trustee). Generally, trusts are taxed at a higher rate than people. This sometimes means that a trustee will establish a grantor trust to help reduce the tax burden on the trust.
When trustees set up this form of trust, they maintain an interest in the assets of the trust and fully control all of the assets that apply to that percentage. A traditional trust lists the name of a trustee and the t ype of trust. These trusts generally have deadlines, for example, of 10 years, which allows the income and assets of the trust to be taxed at the lower personal rate of the beneficiary (the trustee).
According to the Internal Revenue Service, "...all 'revocable trusts' are by definition grantor trusts. An 'irrevocable trust' can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor."
Those considering setting up a trust need to make sure they speak with a qualified financial planner. The tax ramifications of trusts are a lot more challenging than some may think. Trusts are good for estate management, but they are not always beneficial for taxes.