Financial Tips

    Financial Tips

    Financial Tips

    Test Your Knowledge of Grantor Trusts
    (Updated: 01/09/2018)

    A grantor trust is a trust in which the grantor (i.e., the person who establishes the trust by gift or grant) or the grantor’s spouse retains certain powers or rights, such as:

    • A reversionary interest that exceeds more than 5 percent of the trust’s value when the reversionary interest is created
    • The power to determine who will receive income or principal
    • The right to buy, borrow, or substitute trust property under terms that favor the grantor
    • The right to revoke
    • The right to use income to pay life insurance premiums on the life of the grantor or the grantor’s spouse

    True or false?
    A grantor trust can be irrevocable for gift and estate tax purposes and still cause the grantor to recognize taxable income, even if he or she does not receive trust income.

     

     

     

    Answer: True

    A grantor trust uses the tax identification number of the grantor for income tax reporting purposes. The trustee reports trust income, deductions, and credits to the grantor. In turn, the grantor discloses these items on his or her personal tax return. A revocable trust is a grantor trust while the grantor is alive, but it becomes a separate tax entity after the grantor dies—even if the name of the trust remains the same.

    Recognizing taxable income and paying income taxes on income that may not be received by the grantor may seem like negatives; however, they free the beneficiaries from the burden of paying income tax and allow the trust assets to grow for the beneficiaries’ benefit. In this way, the grantor is able to make tax-free gifts to the beneficiaries. If the grantor decides the trust is sufficiently funded, or if it is no longer desirable to pay the trust’s income taxes, the grantor trust powers can be forfeited or waived—converting the trust to a nongrantor trust that becomes its own tax entity. With a nongrantor trust, the distributed income is taxed to the beneficiary who receives it.

    This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

     

     

     

     

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    Fact vs. Fiction

    We understand that it can be tricky navigating the world of personal finance. Everyone seems to have an opinion, and it can be hard to know what to believe. We created this series as a way to present and debunk some of the most common financial myths.

    Fiction: If my children or grandchildren work in a public service job for 10 years, they can have their student loans forgiven.

    Fact: It depends on the loan. The U.S. Department of Education has changed the qualifications for the Public Service Loan Forgiveness Program (PSLFP). Only direct federal student loans qualify for the PSLFP, which forgives loans for borrowers who have worked for 10 years in public service and made timely payments during that time. The name of the loan will tell you if it’s a direct loan—look for the word "direct" (e.g., "direct PLUS loans").

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    Last Updated: 01/12/2018