Standard Living Trusts
There really isn’t a trustor vs trustee issue when you are using a standard living trust, because the trustor and the trustee are almost always the same person – you.
The trustor is the person who creates the trust and the trustee is the person who manages the assets of the trust or “trust fund.”
In a standard living trust, the trustor and the trustee need to be the same person in order to get the tax treatment offered to a “grantor trust.” The IRS looks at the trustor vs trustee situation to make sure they are the same person.
The IRS will “ignore” a grantor trust which has to have the same person as trustor and trustee. The trust fund won’t be taxed as a trust asset. It will be taxed (for income tax purposes) under the social security number of the person acting as trustor and trustee.
When you’re doing your trust planning, keep in mind the trustor vs trustee tax issues. If the trustor and trustee are not the same person, trust planning becomes a lot more complex.
When one person creates the trust fund, another person manages it as trustee and a third person is the beneficiary, the IRS suddenly says the trustor is “giving” a gift, and a gift tax may be owed to the IRS.
The Land Trust
A lot of people fall into a trustor vs trustee trap, because they use a “land trust,” and the gurus all say that in order to protect the trustor’s identity, another person has to be the trustee. Suddenly, you don’t have a grantor trust anymore, and the IRS is looking at your little trust fund with greedy eyes.
Trust tax rates are very high compared to individual tax rates, and people get in trouble with the IRS when they do trust planning and don’t pay attention to the trustor vs trustee issues. If they’re not paying attention, they can end up paying a lot more income taxes.
The land trust gurus don’t understand what a grantor trust is, and they never even think “tax.” If you’re really worried about asset protection, just remember the biggest threat to your financial future is the IRS, not a thief or lawsuit.
Be careful when it comes to trustor vs trustee decisions. Understand the grantor trust rules. If you are wearing both the trustor and trustee hats, you are probably safe. If you’re not both the trustor and the trustee, you may have some big problems.