The trust creator is called the grantor of the trust, and the trustee is the trust administrator. The grantor will typically act as the trustee throughout his or her life. If you create this type of trust, you still control the assets that you conveyed into the trust.
You are retaining incidents of ownership in legal parlance, so the assets in the trust are still considered to be your personal property. If income is earned by assets in the trust, you would claim that income on your personal income tax returns. Plus, assets in the trust would be counted as part of your estate for estate tax purposes.
When assets appreciate, the capital gains tax will enter the picture. You would pay this tax when you realize a gain. A gain is realized when the asset is sold and you take possession of the liquidity.
A long-term capital gain is a gain that is realized at least 12 months after you purchase the asset. Most people pay a 15 percent long-term capital gains rate, and the highest income earners pay 20 percent.
Short-term capital gains are realized less than a year after the original purchase, and these gains are taxed at your regular income tax rate.
When inherited appreciated assets are being transferred, the inheritor gets a step-up in basis. The appreciation that took place during the life of the decedent would not be the inheritor’s responsibility. For capital gains purposes, the value of the inherited assets would be equal to their value at the time of the inheritors acquisition of them.
Assets that were conveyed into a living trust would get a step-up in basis. This is because of the fact that the grantor/trustee retained incidents of ownership while he or she was still living. The inheritor wouldn’t have to pay capital gains tax on the appreciation, but the inheritor would be responsible for any future appreciation.
Value of Living Trusts
A living trust can be a good choice for many different people, and you do not have to be wealthy to create a living trust. With these trusts you can include stipulations that would prevent inheritance squandering, and you can name someone to manage the trust in the event of your incapacitation.
The asset transfers that would take place after your death would not be subject to probate, and this is another benefit. Probate is a time-consuming and potentially expensive process, and it would enter the picture if you use a last will as the centerpiece of your estate plan.
If you would like to learn more about living trusts, download our in-depth special report. This report is free, and you can access your copy through this page: Free Living Trust Report.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.