In Texas, trusts are essential tools for managing and distributing your assets effectively. Understanding the differences between grantor trusts and non-grantor trusts can significantly impact your estate planning decisions. Attorney Stuart Green, located in Houston, serves clients across Texas as a Houston, TX domestic asset protection trust lawyer and can provide expert guidance on these matters.
Grantor Trusts Explained
A grantor trust allows the person who creates the trust, known as the grantor, to maintain control over the trust and its assets. For tax purposes, the grantor is considered the owner of the trust assets, meaning they are responsible for paying taxes on any income the trust generates.
In a grantor trust, the grantor has the ability to modify or revoke the trust, make investment decisions, and decide on distributions to beneficiaries. Assets held in a grantor trust are typically included in the grantor’s estate, which could result in estate taxes upon the grantor’s death. Additionally, any income earned by the trust is reported on the grantor’s personal tax return, whether the income is retained in the trust or distributed to beneficiaries.
Common types of grantor trusts include revocable living trusts, which are designed to avoid probate and offer flexibility during the grantor’s lifetime, and irrevocable life insurance trusts (ILITs), which hold life insurance policies outside of the grantor’s estate to potentially reduce estate taxes.
Non-Grantor Trusts Unveiled
A non-grantor trust involves the grantor relinquishing control and ownership of the trust assets. The trust is considered a separate entity for tax purposes and is responsible for paying taxes on its own income. Distributions to beneficiaries from a non-grantor trust may also be taxable.
In a non-grantor trust, the grantor typically does not control the trust’s assets, including investment decisions and distributions. Assets in a non-grantor trust are generally excluded from the grantor’s estate, which can help lower estate taxes. The trust itself is responsible for paying taxes on any income it generates. Beneficiaries may also need to pay taxes on income distributed to them, based on their own tax rates.
Examples of non-grantor trusts include irrevocable trusts, which generally cannot be altered or revoked by the grantor once established, and charitable trusts, which benefit charitable organizations and may offer tax benefits to the grantor or their estate.
Making The Right Choice
Choosing between a grantor trust and a non-grantor trust depends on your personal goals and financial situation. Grantor trusts provide flexibility and control during your lifetime but come with tax implications. Non-grantor trusts may offer estate tax benefits and asset protection but require giving up control over the trust assets.
For Texans, it’s also important to note that the estate tax exemption is $13.61 million per individual in 2024. This exemption is scheduled to sunset in 2026 unless extended by future legislation.
Consulting with an experienced estate planning attorney at Stuart Green Law, PLLC can help you determine the best trust structure for your needs. Understanding these differences will help you make informed decisions that align with your estate planning goals and protect your assets effectively.