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C. living Trust not save tax

C. A simple living Trust will not save any tax

Keeping property in a Trust and out of your probate estate does NOT mean you pay no income tax on income from that asset. Nor does it mean the asset is out of the taxable estate for federal estate tax purposes. To accomplish tax savings of either kind, a variety of more complicated, irrevocable Trusts are available (see below).

For income tax purposes, whether or not a Trust will be recognized as a separate entity depends on the degree of control retained by the Grantor. Basically, any meaningful, ongoing control over Trust property that one might want to keep, would make it a “Grantor Trust” under the tax code. (E.g., The mere power to revoke makes any revocable Trust a “Grantor Trust.”) “Grantor Trusts” are completely ignored by the IRS for income tax purposes. The Grantor would be taxed as if the Trust property were owned in his individual name, and no Trust existed.

For estate tax purposes, the Grantor Trust regulations do not apply, but the “no strings attached” rule still does, and the result is basically the same. A Trust can be drafted to enable the Trustee to handle a wide variety of future situations, but if it is intended to avoid inclusion in your taxable estate, it must be written in stone. Certainly, any Trust that the Grantor can revoke will be included in his/her taxable estate. Likewise, if the Grantor retains the power to change the terms of the Trust in any significant way.

Wouldn’t it be nice to have the tax advantages of an irrevocable Trust, while maintaining formal control? Obviously, we assume any Trustee chosen is going to respect your opinion. But can you create a Trust, useful for tax planning, while retaining the power to give the Trustee binding directions? No.

The bottom line is simple: To keep property out of the taxable estate – with a Trust or not – you must give up both control and the right to receive personal benefit. That is what “no strings attached” means.

Especially in this area, do not try to be “cute” with the tax law. If something is not allowed because of a particular rule or law, and you concoct a plan that seems to get around it – think twice. Experience shows that, 99.99% of the time, these “great plans” are totally ineffective. Unfortunately, you (or your heirs) might not find out until it is too late that the IRS does not accept your scheme.

The Internet has allowed a variety of scam operators to reach and separate unfortunate suckers from their money. Be watchful for emails touting “too good to be true” income and estate tax benefits, as well as ironclad protection from creditors, all while you have unfettered access to your property.

These arrangements include the so-called “Pure” Trust, also known as the Liberty, Freedom, Constitutional, Contract, or Common Law Trust. These are ALL complete scams and their promoters are thieves. The pitch usually involves a convoluted, totally bogus legal explanation – and a warning that no lawyer can be trusted to advise you on this. Just forget these enticements. The claimed tax advantages cannot be lawfully obtained, and the IRS has announced a crackdown on these arrangements.

So, revocable Trusts (and others with strings attached or benefits retained by the Grantor) should be considered with the intention of achieving non – tax objectives, such as avoiding probate court, planning for disability and flexibility in property management. Those concerned with tax savings must consider a Trust that is irrevocable, and has none of the other prohibited “strings.” (More later.) As a trade-off, irrevocability presents the obvious and significant drawbacks associated with losing control over one’s property.

Small income tax savings might be possible in some families through the use of an irrevocable Trust. Irrevocable Trust income will be taxed using special Trust tax brackets, rather than the beneficiaries’ brackets, unless the income is actually received by them. But the 1993 tax bill greatly lowered the amount of Trust income subject to these favorable rates, so this should not be a motivating factor for most people.

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