There are a plethora of reasons why trusts are formed, the question is why are there different trusts and what is their purpose?
Before we get into the reasons and taxation concerns, let’s define all of the moving parts of a trust. A trust is a legal document, containing a Grantor (sometimes referred to as Trustmaker), this is the person making the trust. Then you have a Trustee, the person or entity that controls the assets in the trust.
Then you have the beneficiaries, the person(s) that will receive the assets of the trust under the conditions laid out in the trust. An important concept to understand is that there are Revocable Trusts, meaning the trust document can be changed and Irrevocable Trusts, which cannot be changed.
For tax purposes, a Revocable Trust is a Grantor Trust, which means the Grantor pays any income tax that is due on the money that is earned in the trust. Revocable Trusts are usually formed to avoid probate, a process that varies between the states.
Generally, a person can die intestate, meaning they had no estate plan. The person’s estate will go through probate and the assets will be disbursed according to the laws of the state.
About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.