3 minute read
In Part 4 of Simplifying Nevada Trusts, we break down some features and benefits – and give examples – of grantor and non-grantor trusts. Read on to determine which type of trust can help your clients reach their financial and life goals.
Income Tax Treatment of Grantor and Non-Grantor Trusts
A trust’s grantor (or non-grantor) status usually determines income tax treatment. For the most part, the following applies. However, there can be some exceptions to the below.
Grantor Trust
As a financial advisor, you are likely familiar with a revocable living trust, sometimes referred to as a family trust. A grantor trust is a revocable living trust – so long as the grantor is alive.
Features of a Grantor Trust
The key features of a grantor trust are:
· the settlor maintains control of trust assets, and
· the settlor continues to pay income tax on trust assets
Unlike a non-grantor trust (covered below), a grantor trust's settlor (usually) receives no income tax benefit. Instead of getting state income tax savings, the settlor maintains control of trust assets.This asset control means the settlor can use trust assets as they wish, be it selling assets, using assets, giving away trust assets, or even wasting trust assets – all without approval from any other body.
Non-Grantor Trust for State Income Tax Savings
The establishment of a non-grantor trust creates a new tax entity. With that, the settlor is no longer liable for taxes created by assets held in the trust; instead, the trust itself is the taxpayer. This strategy – establishing a distinct tax entity with a non-grantor trust – can offer significant tax savings.
A Nevada Incomplete-gift Non-Grantor (NING) trust is a type of non-grantor trust, often created to avoid state income tax. NING trusts work best when settlers are at the maximum federal tax bracket, live in a high-income tax state, and hold intangible assets, e.g., private equity from a family business.
Of course, there is no free lunch: tax savings come at the cost of asset control; settlors must give up some asset control to reap the tax benefits of a non-grantor trust.
Selecting a Trust for Your Clients
Grantor or non-grantor trust: which one makes sense for your clients? Unfortunately, the real question is not that simple. That’s because the grantor/non-grantor feature may be just a single feature of a trust. When selecting a trust, there are more considerations than income taxes and asset control. Consider:
· asset protection
· legacy planning
· estate tax planning
In short, before selecting a trust, determine your clients’ needs. Get to know your clients; learn what is most important to them. From there, you can guide your clients to the trust that will help them achieve their financial and life goals.
If you haven’t already, don’t forget to subscribe to our YouTube channel to stay updated on the latest Dunham Insights.
Disclosure:
This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.