A grantor trust can be an invaluable tool to use when estate planning in California. Here’s what you need to know about it.
What is a grantor trust?
A grantor trust is an irrevocable trust, where the grantor (or person who creates the trust) can put assets into the trust but still retains control over it. Depending on how you set it up, this type of trust can be revocable or irrevocable.
How does a grantor trust work?
As described, the trust’s grantor is also the trustee, meaning they control the assets in the trust. The grantor can put any type of asset into the trust, including cash, stocks, bonds, and real estate. They can also name themselves as a beneficiary and receive income from it during their lifetime.
When the grantor dies, the assets in the trust are distributed to the beneficiaries named in the trust documents. The successor trustee will take over as the owner of the trust but still abide by the wishes of the grantor.
Why would someone want to create a grantor trust?
The unique thing about grantor trusts is that the IRS doesn’t recognize them as taxable entities. Therefore, only the creator gets taxed for the income generated from the trust as if it were personal income. Meaning instead of using the tax rate, the IRS will use individual rates.
There are two advantages trust creators and their beneficiaries can reap from this. Firstly, the individual tax rate is much lower compared to trust rates. Secondly, the trust income can accumulate within the trust without being taxed if you leave it there, which allows the money to grow much faster.
A basic trust such as a living trust can also function as a grantor trust in California. With the tax advantages it comes with, you may find it ideal for you and your beneficiaries. But, keep in mind the pros and cons unique to your circumstances.