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Estate Planning Trusts


Note: In all cases, when implementing a will or a trust, legal advice is a must!

Life’s Defensive Moves!  It's Called a What?

Interpreting Estate Planning Trusts 

Special thanks to Jefferson Pilot Financial.

Trusts bring life to estate planning, but understanding how one trust differs from another is not easy. And those names! They are amalgams of words and initials that only raise questions.

Making trusts fulfill estate planning goals and dreams can be science and art. By understanding the practical science of trusts, a planner can understand why a trust may be appropriate, how a trust functions, and how to offer the best trust solution.

Following is a review of the fundamental elements of trusts and characterizations of popular estate planning trusts. Using these fundamental elements can be a great help in deciphering the purpose, strategy, and tax treatment of different trust arrange­ments.

Trust Fundamentals


Trusts have three parties known as the grantor, the trustee, and the beneficiary.

The grantor, also known as the creator or settler, is the person that creates the trust, names the other parties, selects the trust's provisions and initially funds the trust. A grantor may be an adult individual or an or­ganization.

The trustee is the person empowered to administer the trust, manage trust assets, and act for the benefit of the trust benefici­aries. The trustee's powers are listed in the trust document and in state law. A trustee may be an adult individual or an organization, such as a bank or trust com­pany.

The beneficiary is the person that re­ceives the benefits from the trust. Often, the trust will name multiple beneficiaries. Sometimes these beneficiaries are di­vided between income beneficiaries and remainder beneficiaries. Income benefici­aries typically receive the income and possibly small amounts of principal, for a stated period of time or for life. Remain­der beneficiaries typically receive the prin­cipal, any accumulated income, and all remaining assets of the trust at the end of the term.


Trusts can be created at two times: dur­ing the grantor's life, known as an "inter vivos" trust or a living trust, and at the grantor's death, known as a testamentary

trust. Grantors typically draft trust documents (known as trust agreements, Deeds of Trust, or Declarations of trust) with an attorney and sign them at the end with any required seal or witness. Testamentary trusts are created in a will.


The trust becomes a separate legal entity when the terms are established in the trust document and the trust is funded with assets that are delivered to the trus­tee. Often, trusts are nominally funded with $10 or $100, and then are subsequently funded with larger amounts of assets, life insurance proceeds, or by will.

Tax Treatment

What makes trusts complicated are the tax laws associ­ated with them. Trusts can be classified differently for income tax and transfer tax purposes, so we'll look at each of these separately.

Federal Income Tax:

The income tax on trust income must be reported and paid by one of the three trust par­ties: the grantor, the beneficiary or the trustee. To de­termine who pays the tax, income tax law classifies trusts as a grantor trust, a simple trust, or a complex trust.

A grantor-type trust is treated for income tax purposes as if the grantor owns the trust property. The grantor is subject to tax on the income of the trust. A simple trust is a trust that distributes all of its income every year to a trust beneficiary. The income tax on the income also goes to the trust beneficiary. The trust is treated as a pass-through entity, receiving income and passing it through to the beneficiary. The trust will report the dis­tribution, the taxable portion, and the type of income (such as capital gains, dividends, and ordinary income), to the IRS and to the beneficiary.

A complex trust may accumulate income. If it receives income and distributes it in the same year, then the beneficiary pays the tax as described above for a sim­ple trust (as a pass-through). However, if the trust ac­cumulates income, it must pay the tax on the income that accumulates. The trust is generally subject to the same rules as individual taxpayers, except that it has a very small exemption amount and is almost immedi­ately in the top tax bracket of 35%. A trust's income tax rates on dividends and long-term capital gains are cur­rently 15%

Federal Gift and Estate Tax:

Although a trust is a separate legal entity, it may or may not be treated as a separate entity for transfer tax purposes. The distinc­tion is often based on whether the trust is revocable or irrevocable.

A revocable trust is treated as owned by the grantor for transfer tax purposes and is included in the grantor's taxable estate when he dies. Transfers from the gran­tor to a revocable trust will not be considered a gift or bequest. However, any transfer from the trust to an­other person will be treated as a gift or bequest from the grantor at the time of distribution. If a revocable trust becomes irrevocable, then a gift or estate transfer occurs at the time it becomes irrevocable.

An irrevocable trust is a separate legal entity and, unless the grantor has retained certain powers over those assets, the assets in the trust are not included in the grantor's estate. Transfers to the trust are treated as gifts (transfers during life) or bequests (transfers made upon death). Gifts to an irrevocable trust are treated as gifts to the trust beneficiaries.

Combining Advantageous Tax Treatment:

the income tax and transfer tax are two separate tax regimes, it is often possible to combine the preferred income tax treatment into a well-drafted irrevocable trust. For example, an irrevocable trust may be drafted so that income tax is paid by the grantor, the trustee, or the beneficiary. Examples may be found in the trust descriptions below. However, revocable trusts are, by definition, grantor-type trusts for income tax purposes; no other income tax treatment is available until the trust becomes irrevocable.

The tax identification number used by the trust usually depends on whether it is a grantor-type trust for income tax purposes. A grantor-type trust may use the gran­tor's Social Security number or may obtain its own Em­ployer Identification Number from the IRS. Any other type of trust must obtain and use an EIN. Trustees may obtain EINs from the IRS immediately by phone or website.

Author’s note:  The intent of this article by termlifeamerica.com is to inform and motivate the general public into action.  One should consider only a qualified practicing legal individual or entity, in the state in which you reside, to establish properly drawn documents of this type.

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