Trustor Vs Trustee: Is There Really a Problem?

Standard Living Trusts

There really isn’t a settlor-trustee issue when using a standard living trust, because the settlor and trustee are almost always the same person: you.

The settlor is the person who creates the trust and the trustee is the person who manages the trust assets or “trust”.

In a standard living trust, the settlor and trustee must be the same person to obtain the tax treatment afforded to a “grantor trust.” The IRS looks at the situation between the settlor and the trustee to make sure they are the same person.

The IRS will “ignore” a grantor trust that must have the same person as settlor and trustee. The trust fund will not be taxed as a trust asset. It will be taxed (for income tax purposes) under the social security number of the person acting as settlor and beneficiary.

When planning your trust, consider the tax issues of the settlor versus the trustee. If the settlor and trustee are not the same person, planning for the trust becomes much 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 that the trustor is “giving” a gift, and the IRS may be owed gift tax. .

land trust

A lot of people fall into the settlor versus trustee trap, because they use a “land trust”, and all the gurus say that in order to protect the identity of the settlor, someone else has to be the trustee. Suddenly, you no longer have a grantor trust, and the IRS is looking at your little trust fund with greedy eyes.

Trustee tax rates are very high compared to individual tax rates, and people get in trouble with the IRS when they rely on planning and don’t pay attention to trustee versus trustee issues. If they’re not paying attention, they can end up paying a lot more income taxes.

Land trust gurus don’t understand what a grantor trust is, and they don’t even think about “taxes”. If you’re serious about protecting your assets, remember that the biggest threat to your financial future is the IRS, not a thief or a lawsuit.

Be careful when it comes to settlor versus trustee decisions. Understand the rules of the grantor trust. If you’re wearing both the settlor and trustee hats, you’re probably safe. If you are not both the settlor and the trustee, you may be in big trouble.