Thursday, February 02, 2012

Some references on trusts: "Grantor v. non-grantor"; "revocable" v. "irrevocable"

Rocco Beatrice of Estate Street Partners and UltraTrust have a recent video explaining Grantor Trust and Irrevocable v. Revocable Trust here.  In 2013, the estate tax exemption on a person is $5 million, but Rocco says the estate tax levels have changed 38 times since 1950.

A Grantor Trust creates a third legal person and gets assets out of the grantor’s (the real person with the money) name, for protection from creditors.   The Grantor has the money but does not formally own the assets (often not even the home).  It is typically desirable to make the trust irrevocable, which typically means that the Grantor cannot withdraw from it but may borrow from it “almost” without supervision and without repayment, and in the mean time files income and expenses on his regular income tax. The main provisions are in IRS codes 674-675 and 121  (for example, Tax Almanac gives this).  

It would seem that the Grantor's behavior, while he has great powers to "borrow", could be questioned by others if he acted irresponsibly, particularly in today's sensitive political climate.  If you draw on assets that are not yours, it's better if somehow they can help take care of other people (maybe by employing them). 

A revocable trust would remain exposed to creditors.   Rocco gives an example similar to my “back yard baseball” in the 50s.  The “grantor” – in my case, me (in effect) allowing other boys to play softball in our backyard, could control the rules (how far it is to the outfield fences – we had a big yard). When the other boys “lose” they can whine and go home, particularly if the grantor changes the rule so he can personally get better results.  The sports analogy of “home field advantage” makes sense (but not during Super Bowl week!).

The UltraTrust link (which was apparently first written around 2001) is here.

“Dummies” has a page explaining grantor v. non-grantor trusts here.

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