Identifying Different Types of Trusts

• Author: Margaret A. Munro, Kathryn A. Murphy
• Profession: Has more than 30 years' experience in trusts, estates, family tax, and small businesses/Attorney with more than 20 years' experience administering estates and trusts and preparing estate and gift tax returns
• Pages: 31-55

CHAPTER 3 Identifying Dierent Types of Trusts 31

Chapter3

Identifying Dierent

Types of Trusts

Trusts come in every size, shape, color, and variety. There are enough dier-

ent types of trusts for every day of the week and every month of the year.

Trusts can give money away, save money, pay only certain expenses, or buy

the moon. Trusts can contain almost any type of property for almost any length of

time, so long as it’s not forever (although almost forever certainly works).

In fact, the sheer number of dierent types of trusts makes the possibilities for

their use almost endless. Not to worry though. You don’t need to memorize all this

information. Just know that this chapter takes you on a tour of some of the more

popular types of trusts and trustees and shows you how to determine what type of

trust you’re holding, and what sorts of administration you may be asked to

undertake.

IN THIS CHAPTER

»

Understanding the dierence

between grantor- and non-grantor-

type trusts

»

Deciding when the trust will start

»

Dening various types of revocable

and irrevocable trusts

»

Grasping charitable trusts

»

Qualifying a trust as a Subchapter S

corporation shareholder

32 PART 1 Getting Started with Estate and Trust Administration

Dierentiating for Income Taxes:

Grantor versus Non-Grantor Trusts

You can slice and dice trusts in any number of ways, depending on the terms and

provisions of a particular trust. But however they may be categorized, all funded

trusts (trusts that hold assets) are divided into two main types for income tax

purposes: grantor and non-grantor. You must determine what manner of beast

the trust you’re administering is in order to prepare and le the correct income

tax returns in the correct way each year. Remember, funded trusts are taxable

entities, and you must make the decision either to le a Form 1041 for the trust,

or to declare all items of income and deduction on the grantor’s (the person who

created the trust) Form 1040. And watch out! Although it’s not common, you

maycome across a third type of trust: the intentionally defective grantor trust, which

contains elements of both grantor and non-grantor trusts.

All trusts have the following participants: grantors (sometimes referred to as donors

or settlors), trustees, beneciaries, and remaindermen. (If you’re not sure who

these folks are, we dene them all in Chapter1.) The determination of whether a

trust is grantor or non-grantor depends on the relationship of each of the partici-

pants to the grantor. The following sections spell out these types of trusts and help

you know how to dierentiate between them so you can be sure that you’re admin-

istering them correctly and reporting the income on the correct income tax return.

Grantor trusts

Grantor trusts allow the person who creates the trust to retain certain powers

overthe administration of the trust, often up to and including the power to revoke

the trust and regain ownership of trust property while that person is living. If,

for example, the grantor names him- or herself, or his or her spouse during

the grantor’s lifetime, as trustee, you’re looking at a grantor trust. Likewise,

ifthegrantor or the grantor’s spouse is an income beneciary, the trust is grantor.

The key to identifying a true grantor trust doesn’t necessarily rest on the grantor’s

power to revoke the trust but rather on the grantor’s keeping control, however

tenuous, over the property inside the trust.

In a grantor trust, the grantor is typically not only grantor but also a trustee; heor

she is usually beneciary of not only the trust’s income but also as much of the

principal (the property funding the trust) as he or she needs at any given time. (To

understand the complete distinction between principal and income, check out

Chapter12.) Generally, in a grantor trust, the existence of the trust is ignored for

income tax purposes, and the grantor declares all items of income and deduction

on his or her income tax return. In most cases, the trust doesn’t even have its own

Tax Identication Number (TIN, the trust equivalent of a Social Security number)

because the trust doesn’t need to le its own tax return.