ST. LOUIS--When it comes to money, many people are familiar with the term 'trust,' but may not be aware of the difference between a revocable and an irrevocable trust, especially when it comes to tax planning.
Sandy Furuya, Senior Accounting Manager at Wamhoff Financial Planning & Accounting Services, explains the differences and why understanding them is a must for tax time.
What is a Revocable Trust?
• May also be referred to as a revocable living trust, a living trust, or an intervivos trust.
• This is a type of trust that can be changed at any time. Modification of the terms of the trust is done through a trust amendement.
• Changes can be made about who the beneficiary or trustee of the trust will be. Or you may decide to completely revamp the entire trust through an amendment and restatement.
• Assets funded into the trust are considered your personal assets for creditor and estate tax purposes. That means the trust does not provide protection if you are sued, and all of the trust assets will be considered for Medicaid planning purposes.
• All assets in the name of the trust at date of death will be subject to both Federal and State estate taxes (if applicable).
Why use a Revocable Trust?
• To avoid probate: the assets held in the Revocable Living Trust at the time of the person`s death will pass directly to the beneficiaries named in the trust agreement and will not go through the probate process.
• Privacy protection after death: the trust agreement is a private document, not a last will and testament which must be admitted to probate, and becomes public record anyone can access.
Tax Implications of a Revocable Trust:
• While living, the Grantor will report the taxable assets reported in the trust on their personal tax return, under their social security number.
• If the trust is amended to remove the Grantor as trustee and the Grantor is no longer in control, a Form K-1 will pass through from the Trust to the individual.
What is an Irrevocable Trust?
• A type of trust which cannot be changed after the agreement has been signed, or that its design becomes irrevocable after the Settlor dies.
• For example, an irrevocable trust can be designed to break into separate trusts for the benefit of a surviving spouse (called AB trusts) or into multiple trusts for the benefit of the children.
Why use an Irrevocable Trust?
• Estate tax reduction through the AB trusts created for the benefit of the surviving spouse.
• Asset protection. The Settlor gives up complete control, including access to the trust assets. In many instances, these assets cannot be reached by a creditor.
• When implemented properly, the assets are not used in the calculation for Medicaid spend-down and VA planning.
• When appropriate, an Irrevocable Trust can be designed to allow the Settlor`s family to be named as lifetime beneficiaries, thereby utilizing trust assets to supplement their own needs, thus providing financial support.
What are the tax implications of an Irrevocable Trust?
• Depending on the type of Irrevocable Trust, the Trust will file its own tax return and pay at the trust tax level.
• In the initial year in which the assets are transferred to the trust, that transfer is considered a gift. Therefore, filing a Gift Tax Return may be required.
Trusts and the applicable taxes can be complex. Regardless of the type of trust you`re considering, or that you already have in place, always consult with your attorney and tax professional.
To learn more visit: http://www.wamhoff.com/