Effective Uses of Trusts in Estate & Gift Tax Planning
Effective Uses of Trusts in Estate & Gift Tax Planning
Function of Estates
An estate is a legal entity that originates upon the death of an individual. An estate is set up to administer all legal affairs of the decedent to be settled and to distribute the assets owned by the decedent. Once all estate legal requirements are satisfied, all property is distributed and the estate terminates. An estate is a taxable entity that generally lasts only for a few years.
However, they can continue for several years if the correct distribution of the decedent’s wealth is in question. If an estate’s administration is unreasonably prolonged, the IRS can terminate the estate for tax purposes (Reg. 1.641 (b)-3(a)).
Function of Trusts
The primary purpose for a trust being established is to protect and preserve assets f or the benefit of the beneficiaries. Although there are many types of trusts, all trusts generally have the same elements. These elements are:
- The Grantor: Person who creates the trust and transfers legal ownership of assets to one party.
- The Trustee (fiduciary): Person who receives the assets and protects and administers the trust according to the trust instrument.
- The beneficiary (ies) : Person (s) to whom the trust assets are designated.
- Trust Property: Also known as corpus or principal. Property legally owned by trust.
A trust may contain real and/or personal property. A trust cannot operate an active trade or business. A trust that becomes involved in an active, profit-making business runs the risk of being classified as an association for federal tax purposes. This association will be taxed the same as a corporation (see Morrissey v. Comm., 36-1 USTC 9020, 16 AFTR 1274, 296 U.S. 344 (USSC, 1936)).
Two broad categories of trusts are the inter vivos and testamentary trusts. Inter vivos trusts (living trusts) take effect during the settler’s lifetime, and are created through a gift of property by a living settlor to a trustee, for the uses and purposes specified in the trust instrument. A testamentary trust (created by a will) is a disposition of property which takes effect at the grantor’s death.
Trust Beneficiaries
An individual (the grantor) that establishes a trust has virtually unlimited discretion as to the identity of the trust beneficiaries and the interest in the trust given to each beneficiary. The grantor can specify one beneficiary to receive a lifetime right to the trust income (income beneficiary) and another beneficiary the right to the trust corpus at some future date. A beneficiary that has rights to the corpus (or principal) is sometimes called a remainderman.
A beneficiary who receives a distribution from a trust will receive a summary of the tax consequences of the distribution in the form of a Schedule K-1 from the executor or trustee. The K-1 will tell the beneficiary the amounts and character of the various items of income that must be reported and taxed on the beneficiary’s return. A beneficiary also may be entitled to depreciation or depletion deductions and tax credits because of fiduciary income.
We hope you found this article about “Effective Uses of Trusts in Estate & Gift Tax Planning” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or website www.GROCO.com.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
A Look Ahead: The Venture Capital Industry of the Future | David Silverman
“A Look Ahead: The Venture Capital Industry of The Future”, David Silverman transcript, interview by Alan Olsen, Host of the American Dreams Show: David brings more than 15 years of experience working with technology businesses as a venture capital investor and investment banker. Prior to joining Crosslink, David was a partner at 3i Ventures, a…
Robert Zuccaro – How Wall Street Reshaped America’s Destiny
Robert Zuccaro interview transcript, “How Wall Street Reshaped America’s Destiny”: Alan Olsen: In 2011 thousands of people gathered in the New York’s Financial district the to protest. The movement became known as, Occupy Wall Street. At the time, the economic collapse of 2008 as well as the huge government bail outs were fresh in the…
What Topics Should One Avoid While At Work?
Topics to Avoid at Work Have you ever been around a person who feels like he or she needs to tell you everything about themselves? Someone who reveals way too much personal information, can make others feel uncomfortable. We all have many sides to our lives and our personalities, and some people are more open…
Robert Wood – Founder of Wood LLP
Robert Wood, Founder of Wood LLP interview transcript: Alan Olsen: A lot of time Personal Injury Lawsuits are taken on a contingent fee basis. When a person is awarded great lawsuit settlement, oftentimes after the attorney takes their fee from the lawsuit settlement a the plaintiff gets a tax form in the mail saying they…