Greg Roberts

Greg Roberts

Trusts fall into one of two main categories. The first category is composed of those that are established while the grantor (one who establishes the trust) is alive and are termed inter vivos (while living) trusts.

Trusts may also come into existence by the operation of a will, and these trusts are known as testamentary (from last will and testament) trusts.

Another way to categorize trusts is to view them as being either revocable or irrevocable. As the names imply, a revocable trust can be changed, while an irrevocable trust usually may not.

A testamentary trust is a revocable trust, since it can be changed during the lifetime of the grantor, but it becomes irrevocable after the grantor passes away.

A revocable trust is typically managed for the benefit of the grantor. In most cases, the grantor retains some very important rights over the trust during his or her lifetime. These rights include the ability to instruct the trustee to distribute any of the trust property to a third party, as well as the right to make changes to the trust, including terminating the trust at any time.

If the grantor becomes incapacitated and, thus, unable to manage his or her finances, the provisions of the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, in some cases, to the grantor's family. Distributions from a living trust to a beneficiary, other than the grantor, may be subject to gift taxes that must be paid by the grantor. In 2019, the annual gift tax exclusion is $15,000, so if a distribution to a specific beneficiary is not greater than that amount this year, no gift taxes will be levied.

Upon the death of the grantor, a trust functions like a will and the trust property is distributed to the beneficiaries as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot later be amended without the approval of the trustee and the beneficiaries of the trust. The major impetus behind the establishment of an irrevocable trust has been to gain certain estate and income tax advantages. Due to the recent changes in the taxation of estates, the establishment of an irrevocable is often not required. A single individual’s estate will not pay estate taxes if the value of those assets is less than $11.4 million. Utilizing a concept known as portability, a married couple can shield up to $22.8 million from estate taxation.

Once an irrevocable trust is established and assets transferred to it, those assets are subsequently not part of the grantor’s taxable estate, and any trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the transferred amount is greater than $15,000 multiplied by the number of trust beneficiaries. So, if my irrevocable has 10 beneficiaries, $150,000 can be gifted to the trust this year without any gift tax implications.

However, without becoming overly complicated, depending on the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any current gift tax liability to the grantor. This is due to the synchronization between gift taxes and estate taxes-enough said.

The use of an irrevocable trust can provide other substantial tax benefits apart from saving estate taxes. An irrevocable trust offers many tax advantages over a direct gift, especially when it comes to capital gains taxes. If the trust is established by a grantor, the transfer of appreciated assets transferred into the trust, such as real estate or a stock portfolio, can still receive a step-up in basis upon the death of the grantor. If the irrevocable trust were not in existence and those appreciated assets had been given directly to the beneficiaries, those beneficiaries would pay capital gains on the difference between the sales price and the cost basis of the grantor, rather than their current value as of the grantor’s death.

This style of trust also provides a tax advantage for a grantor’s principal home, since the trust retains the grantor’s exclusion from income taxation (within specified limits) when the residence is later sold by the beneficiaries. Again, this favorable tax result would not ensue if the grantor simply gave the principal residence away during his or her lifetime.

Specific types of trusts can be established to address different type of needs and situations. One such situation combines charitable giving with the generation of current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. The trust is arranged so that there is a current beneficiary who is either the donor or another named individual, and a remainder beneficiary, which is a qualified charity. The trust document provides that the named beneficiary will receive an income stream from the income produced by the trust assets, and upon the death of the grantor, the remaining assets of the trust pass to the charity. There are IRS limits on the duration of the income stream.

This trust arrangement is quite valuable in certain situations, since it generates a current charitable deduction for the grantor based on the present value of the remaining assets when the grantor dies. There are IRS tables to calculate this current value.

More on trusts in next week’s column.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Do you have a financial planning question for Greg? Email him at