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A trust is a legal arrangement in which a third party called a trustee holds assets on behalf of one or more beneficiaries. Trusts can be set up in a variety of ways and can specify how and when assets pass to named beneficiaries. In addition, there are many types of trusts, each having their own benefits and legal requirements. In this article, we discuss an estate planning technique known as a sale to a grantor trust.
Trust Benefits
There are many benefits to trusts. For example, by establishing a trust, beneficiaries may gain access to assets more quickly than they would via a last will and testament. In addition, when an irrevocable trust is established, it typically isn’t considered part of the taxable estate; this can result in a reduction of taxes. Another major benefit of trusts is that they allow assets to pass outside of probate, which saves time and money. Other trust benefits include:
Wealth control: With a trust, you can establish precise terms that direct when and to whom distributions are made. In addition, a revocable trust ensures that trust assets remain accessible to you during your lifetime while designating beneficiaries to receive such assets after your death.
Legacy protection: A trust can also protect your estate from your heirs’ creditors or from heirs who may be irresponsible with money.
Privacy: An additional benefit of trusts is increased privacy. Trusts allow assets to pass outside of probate, which is a public process.
What is a Sale to Grantor Trust?
A sale to grantor trust is an estate planning technique involving a specific type of trust that takes advantage of the difference between certain income tax rules and estate planning tax laws. In this type of transaction, a party first creates an irrevocable trust that is excluded from his or her estate. In most cases, the trust’s beneficiaries are the creator of the trust’s children or grandchildren. When created, the trust contains specific provisions that classify it as a grantor trust as defined by the Internal Revenue Code. Specifically, a grantor trust is a legal instrument that is treated as being owned by the trust’s creator for the purposes of income tax.
Sale to Grantor Trust Process
After creating the trust as described above, the creator of the trust sells assets to the trust in exchange for a promissory note. Since the sale take place between the creator of the trust and his or her grantor trust, the transaction isn’t recognized for income tax purposes. Thus, no capital gains tax is accrued as a result of the transaction.
The funds from the assets purchased by the trust are then used to gradually pay off the promissory note’s balance. If the assets in the trust appreciate at a faster rate than the promissory note’s interest rate, then the sale to grantor trust is likely to be a success.
Contact an Estate Planning Lawyer
If you need assistance with the estate planning process, the experienced attorneys of Bozanian McGregor LLC are here to help. At Bozanian McGregor LLC, our attorneys have years of estate planning experience. So, when you come to us for assistance, we will work with you to create an estate plan that will benefit you and your family for years to come. Please contact us to schedule a consultation with an experienced estate planning attorney.