Trusts can be very effective financial tools for diverting assets to another individual or for a specific purpose such as providing cash flow for a foundation. They can be either revocable or irrevocable as well, which means that revocable trust assets can be redistributed later or reclaimed by the originating party who established the trust. These are also known as grantor trusts, and they are very common for Oklahoma residents for a wide variety of projects. But before establishing a revocable grantor trust, trust administration lawyers in Oklahoma City suggest it is good to understand both the advantages they provide and disadvantages they carry.
What Is a Grantor Trust?
A grantor trust is simply a very specific type of trust in which the grantor (the person who created the trust) is treated as the owner of the trust’s assets for federal income tax purposes. When used properly, grantor trusts can provide some significant benefits. However, there are also some drawbacks, so you must carefully consider the tradeoffs when making a decision about which type of trust is right for your situation.
Advantages of Grantor Trusts
Grantor trusts provide several benefits, and this is why they are such popular estate planning tools. Understanding both the advantages and drawbacks of grantor trusts can help you make a confident decision for your estate planning. Some of the most common advantages of grantor trusts include:
Flexibility and Asset Control
With a revocable grantor trust, the grantor maintains control over the assets in the trust. Additionally, these trusts may be revoked or amended easily at any time. This means that a grantor may easily make changes if they change their mind about beneficiaries or how the trust should operate.
Tax Simplicity
Grantor trusts make tax reporting much simpler. There is no need for the trust to file its own tax returns. Instead, any gains are reported on the grantor’s individual tax return. This makes things much easier when tax season rolls around.
Asset Boosting
Some grantor trusts also allow the grantor to pay the trust’s tax bill while the trust assets grow untouched for the benefit of the beneficiaries. This is a special type of trust known as an Intentionally Defective Grantor Trust, and you should always seek help from an experienced trust attorney in these situations.
Disadvantages of a Grantor Trust
The primary disadvantage of a revocable trust is that the grantor is still obligated to assume the tax burden. Additionally, the tax burden of the estate is not affected by most grantor trusts. The fact that the assets are still considered property of the grantor also means that the trust is still subject to an estate tax in the event of an untimely passing of the creator.
Another drawback of a grantor trust is higher setup and maintenance costs. Trusts are complex legal documents, so you are likely to incur some legal fees as part of the setup. Additionally, trusts require ongoing accounting and other administrative duties, and there may be costs associated with some of that maintenance.
Keep in mind that some grantor trusts are irrevocable. A major drawback to an irrevocable grantor trust is that you lose control over those assets, and the trust cannot be easily changed or amended. Once assets are placed into the trust, you no longer have the authority or right to control those assets. While that setup can offer some tax benefits, it could put you in a difficult financial situation if you were to transfer too many assets into the trust.
It is also important to note that trusts are not as simple as they generally appear. They still fall under the governance of Oklahoma financial laws, and they can be complicated to maintain based on the details of the intended purpose.
Is a Grantor Trust Right For Me?
Whether or not a grantor trust is the right solution for you depends on your personal financial and family situation. You must carefully weigh the advantages and disadvantages of grantor trusts against your personal goals and wishes. An experienced Oklahoma City lawyer for estate planning can help you explore all your options and decide on the right path forward for you. If you need help, contact Helton Law Firm today to schedule an initial consultation and let us help you put the right plan in place.