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A living trust can offer an effective strategy for passing and granting assets. Here’s what you need to know!

What is a Revocable Trust?

A revocable trust, often called a living trust, is essentially an agreement between a trustor and a trustee.  In this agreement, the trustee is granted the right to hold assets and property of the trust for the benefit of a third party called a beneficiary. It is common practice that the individual creating the trust, called the grantor, serves as both the sole beneficiary and sole trustee of the trust until his or her death.

How Does it Work?

While the grantor is alive, he or she is free to take things in and out of the trust at their leisure and without consequence. Upon the death of the grantor, the trust immediately converts into a list of mandatory instructions that must be followed by both the trustee and the beneficiaries of the trust.  Explained a different way, the trust is not disturbed in the event of the grantor’s death.  Instead, it marks the beginning of a smooth and easy transition process.

What Type of Assets Should Go into a Living Trust?

Stocks, brokerage accounts, and personal property are examples of assets that could go into a living trust. These types of assets can be put into a living trust by simply titling the assets in the trust’s name.   Brokerage accounts require a trust certificate and necessary paperwork to either change the account ownership to the trust or put into effect a TOD or POD.  Titled personal property, such as vehicles, boats, and motorhomes, can be put into a trust by changing the title with the local Secretary of State or State Tax Office.

What Type of Assets Should NOT be put into a Living Trust?

Retirement accounts, like IRAs and 401(k)s, should NOT be placed into a living trust. Transferring certain qualified retirement accounts into a living trust may be considered a taxable distribution of deferred income.  To avoid triggering a taxable event, retirement accounts should instead name the trust as the contingent beneficiary of the account, with a spouse and/or children as the primary beneficiaries.  The purpose of naming the trust as a beneficiary is to allow beneficiaries to retain easier rollover elections upon the grantor’s death.

Tax Considerations and Benefits of a Living Trust

There exists a popular misconception that trusts can create elaborate and complex tax consequences.  However, this is not true in most cases.  A revocable trust does not require a separate tax return.  In fact, the grantor files his or her taxes just as they always have in the past, without reference to the trust. Placing assets into a revocable trust will have little to no effect on a grantor’s day-to-day life.

In most states, making a gift of property to a person by putting their name on it as a way of avoiding probate may result in a much lower tax basis for that person (meaning higher capital gains taxes) than putting it into a trust where he or she could elect to get a stepped-up tax basis (meaning lower capital gains taxes).  Additionally, titling brokerage accounts and other securities such as stocks in the name of the trust serves to avoid triggering a taxable event.

Estate Taxes & Trusts

Many types of trusts are designed to reduce potential estate taxes that beneficiaries may face at the grantor’s death.  Discussed below are four examples of trusts that help reduce or avoid estate tax consequences:

Intentionally Defective Trusts: This crucial wealth management vehicle serves to effectively freeze assets for all purposes relating to estate taxes but does not do so for income tax.  An intentionally defective irrevocable grantor trust (IDGT) requires the grantor to pay income taxes generated by the trust instead of the trust paying income taxes itself. This allows the grantor to maximize the trust’s retained assets for his or her heirs because the trust does not have to pay its own taxes.

Crummey Trust: This trust allows you to transfer money to a trust for your child to avoid gift taxes.  However, the benefitting child is limited regarding when they may take the gift from the trust.  If the grantor’s child takes the gift immediately, it may be counted as part of the annual gift limit, which would in turn be counted against the lifetime estate tax exemption.  If the child does not take the gift, however, it becomes part of the trust.

Grantor Retained Trusts: There are several grantor retained trusts, including a grantor retained income trust (GRIT), a grantor retained annuity trust (GRAT), and a grantor retained unitrust (GRUT).  All these trusts allow the grantor to receive benefits of any kind from the trust for a specific length of time.  When that defined period ends, assets are distributed to the remainder beneficiaries.

Irrevocable Life Insurance Trust: With an irrevocable life insurance trust (ILIT), the trust is named the owner of a life insurance policy, while the grantor of the trust is the insured life under the policy.  This structure functions to allow the death benefit of the life insurance policy, once paid, to avoid inclusion in the grantor’s estate for estate tax purposes. Without an ILIT, the death benefit of a life insurance policy will be subject to estate tax that one’s heirs will likely have to pay.  An ILIT is a relatively simple yet extremely effective strategy for high-net-worth individuals seeking to avoid paying estate taxes.

If you have any questions about living trust benefits, please call PCIA North Texas at (214) 765-5092, or you can book an appointment with me here!

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  • “Living Trusts for Everyone”, Ronald Farrington Sharp (2017). Allworth Press.
  • This article is for informational purposes only and not to be construed as financial or investing advice, nor is it a replacement for real-life advice based on your unique situation.

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