On the weekends we are sharing some of our "greates hits" from our blogs and newsletters of the past. This two part series appeared in the "Daily Plan It" of November 2005.
In the first part of this series,weprovided somesimple explanations forthecomplex concept of trusts, andtheroles of the people involvedin them.
Wealso offered the explanation that trusts come indifferent makesandmodels. With the help oftrusted legal and financial advisors, clientscan choose the right model for their needs.
A Trusted Variety
First, your client will need to choose betweena revocable or irrevocable trust.Thisrefers to the ability of the Trustmaker to undo the trust. A revocable trust canbe undone, that is, revoked.An irrevocable trust cannot be undone,andgenerally, the Trustmaker cannot change the terms ofthetrust once itâ€™s established.
Another choice is between living trusts andtestamentary trusts. Living trusts, also known as intervivos trusts, are established duringthelifetimeof the Trustmaker. Testamentarytrusts areestablished after the death of the Trustmaker. A goodwayto rememberthistermis that testamentarytrusts are part of the Trustmakerâ€™s legacy, or testament.
Some Taxation Terms
Accountants willoftenaskwhether a trust issimple orcomplex.This question isnâ€™t asking how easy the trust is to understand or administer.Itâ€™sbasically asking about distribution of the trust income. Simple trustsmandate payment of thetrustâ€™s income to the beneficiaries, while complextrusts do notmandate such payment.
Since weâ€™re talking abouttaxation oftrusts, weneed to considerthe term â€œgrantortrust.â€ With this type of trust, the income the trust earns is taxedto the Trustmaker. Almost all revocable living trustsaregrantor trusts, but some irrevocable trusts canbe grantor trusts, aswell,if thetrustcontains certainprovisions.
If a trust is not a grantor trust, then the trust itselfis considered a separate taxpayer, and is responsibleforpaying the taxes on its income. In other words, if it isnâ€™t a grantor trust, the bucket must pay the taxes from the assets inthe bucket.
The Most Common Combination
The most common type oftrust planning we do isrevocable livingtrusts that are taxed as grantortrusts. These are trusts established during theTrustmakerâ€™s lifetime, which he can undo if he so chooses.
At IdahoEstate Planning we are the expertsyou need to know and trust. Work with us and we'll put together a plan thatworks for you and your loved ones. Remember, goodplanning is no accident.