Can an Irrevocable Pure Grantor Trust Benefit You?
For years, most people thought you had to be very wealthy to receive any benefits from an Irrevocable Trust. As a result, the Revocable Living Trust became the “go-to” estate planning tool for most people. While this avoided Probate, it did not provide any asset protection.
As the Federal Estate Tax limit has increased to $11.58 million per person, as of the date of this writing, less than 1% of Americans are subject to the Federal Estate Tax. With no State Estate Tax in North Carolina, the Irrevocable Pure Grantor Trust has become a viable option for those not subject to estate taxes, but who desire to maintain control, protect their assets, and ensure their assets get to their loved ones with as much flexibility and protection, with the least amount of complexity.
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The Pure Grantor Trust Explained
In a Pure Grantor Trust, the Grantor is taxed on both the income and the estate tax. However, in most cases, the trust value is less than the threshold for estate taxes so there is no tax liability to the grantor for estate taxes, only income taxes. In addition, due to the irrevocable nature, the grantor and the beneficiaries are given the protection of the assets from their creditors.
In addition, the beneficiaries are given a “step-up” in basis at the time of the grantor’s death. If those same assets were given to the beneficiaries during the grantor’s lifetime, not only would the gift be subject to a gift tax, but the beneficiaries would not receive this “step-up” in basis.
With regard to protecting assets, it is well settled that the grantor’s creditors are only entitled to income or assets available to the grantor. Therefore, any assets in the trust that are not directly available to the grantor are protected. Likewise, the beneficiaries’ creditors are prohibited from attaching any potential benefit that has not been distributed.
Another benefit of the Pure Grantor Trust is the ability of the Grantor to control the assets and the terms of the trust. As the Trustee, the grantor may change the principal assets as long as he does not return them to himself. One example of this power would be to sell one stock and replace it with stock in another company.
The grantor may also retain the right to change the current or remainder beneficiaries and the timing, manner, and method of distribution to the beneficiaries by using a Power of Appointment as long as that power does not allow him to exercise the power in favor of:
- His creditors
- His estate or the creditors of the power holder’s estate
As a result of all of these benefits, even those with the most modest assets can receive significant benefits from the use of an Irrevocable Pure Grantor Trust.