A living trust is created and financed by an individual during their lifetime. There are two kinds of living trusts to be familiar with, revocable and irrevocable. Each trust has distinct features that benefit the grantor uniquely. Many people choose to design living trusts because they help avoid probate court.
Although the tax benefits of a living trust are not the primary reason for trust creation, it is critical to be familiar with the potential advantages. These reasons are especially appealing to those who want to reduce the size of an estate.
A revocable trust is completed by creating and executing a trust document, and it is funded by putting assets into it. These assets can be taken back or revoked at any point in time. Similarly, the terms of the trust are more malleable in that they can change if desired.
Although a revocable living trust does not have designated tax advantages, revenue yielded from a property in a revocable living trust may be taxed at a lower rate than the income from property in an irrevocable trust. There are clear non-tax-related advantages to a revocable trust, such as avoiding probate.
In an irrevocable trust, the property goes to a third party for management. Unlike a revocable trust, irrevocable trusts are not malleable and cannot change at any time. Many types of assets can go into a trust, including mutual funds, cash, business interests, and real estate.
We may set up an irrevocable trust to legally separate an individual from their assets for a variety of reasons, including taxes and long-term care benefits such as Medicaid.
Death of the Grantor
When the grantor dies, a trust may continue to function as before, but if the grantor also serves as the trustee, then in many cases the successor trustee will need to settle the trust. The assets in the name of the trust are unaffected and will not require probate. Upon the grantor’s death, the trust may become a separate taxpayer that requires a TIN for income tax purposes. Even if the trust received a TIN during the grantor’s lifetime, a new one is necessary.
The person who inherits the trust could owe inheritance taxes, capital gains taxes, and income taxes. Florida does not have an inheritance tax; however, out-of-state beneficiaries may be subject to them. It is best to contact a legal representative for information.
The Law Office of Amy L. Phillips, PLLC, helps clients throughout the state of Florida with estate planning and trust creation. Call us today to schedule your confidential consultation.