There are many different considerations to take into account when placing one’s assets into a trust. One of the many factors to consider when setting up a trust is whether to make it a grantor trust or a non-grantor trust. While grantor trusts are more common, there are certain circumstances where a non-grantor trust can be useful to meet an individual’s estate planning and asset protection objectives.
A grantor trust is any trust in which the person setting up the trust (the “grantor”) retains
control over the trust. This could mean that the grantor has the power to revoke the trust, change trust beneficiaries, change trust assets, or distribute income from the trust to the grantor or the grantor’s spouse, among other things. The inclusion of provisions that give the grantor power over the trust will make a trust a grantor trust. Most trusts set up for estate planning purposes fall into this category. A non-grantor trust is any trust that is not a grantor trust, meaning the person who set up the trust does not retain rights, interests, or powers over the trust and the trust assets.
The main difference between grantor and non-grantor trusts is how they are taxed. With a grantor trust, the grantor is responsible for paying taxes on any income generated by the trust. Grantor trusts are often set up with the grantor’s Social Security number, so the income is reported directly on the grantor’s tax return. A non-grantor trust is taxed as a separate entity, so the trustee is responsible for filing a tax return for the trust. If the trust pays income to a beneficiary, the income is included in the beneficiary’s taxable earnings. The beneficiaries of the trust are often in a lower tax bracket than the grantor, allowing them to pay less in income tax than the grantor would have.
The structure of the non-grantor trust may be useful in a situation in which the grantor does not want to be involved with the trust at all following its execution; for example, setting up a trust for an ex-spouse following a divorce. It can also be beneficial for small business owners. Putting a sole proprietorship, partnership, LLC, or similar business in a non-grantor trust could allow the business to obtain a 20 percent qualified business income deduction. The deduction is phased out for higher incomes, so separating the business into one or more non-grantor trusts may allow the business to receive the deduction. It can also be a planning tool for those who own expensive real estate. Putting high value real estate in a non-grantor trust could allow the trust to get a state and local tax (SALT) deduction. The SALT deduction is capped at $10,000, so if the property is included in someone’s taxable estate, he can get only one deduction, but if it is placed in one or more non-grantor trusts, each trust will qualify for a separate deduction.
Non-grantor trusts also have their downsides. They are much more expensive to set up and maintain. In addition, the grantor relinquishes all control of the assets in the trust. It is also important to consider that taxes are steeper for a non-grantor trust. To find out if a non-grantor trust is right for you, please contact an estate planning attorney.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Eva Schwechter is an elder law attorney with the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Brightside Advisors, a wealth management firm with offices in New York and Los Angeles.