By now, you probably know creating a trust is the best way to preserve your wealth while you are alive, and protect your assets for your beneficiaries after you’re gone. The ultimate goal? To give more to your loved ones and less to uncle sam.
One type of revocable trust, known as a grantor trust may be an option worth exploring. The grantor trust works by placing assets in a trust to keep them out of the grantor’s taxable estate at death. Grantor trust status also permits the grantor to buy and sell assets from or to the trust without paying capital gains taxes. But, for federal income tax purposes, the grantor is considered the owner of the trust. So, he or she is responsible for paying taxes on any income generated and that tax payment must come from somewhere other than the Trust.
At some point, paying those taxes with money from outside the trust might not be desirable or even possible. You may be able to “Turn off” grantor trust status, but that’s not a guarantee. Even if you are successful in “Flipping the switch,” you may still be responsible for a portion of the capital gains tax you previously avoided.