The grantor, also known as the person who created the trust, is responsible for transferring assets into the trust during their lifetime. Upon the grantor’s passing, the trust becomes the beneficiary of any assets that were put into the trust. Real estate and other types of property, both tangible and intangible, such as a bank account or company interests, may be held in trust as property. Personal property may also be held in trust.
A trust is a different legal entity from its creator, and as such, it can help your heirs save time and money after your passing. Because trust assets can circumvent the probate process and flow to beneficiaries outside of court, a trust is an essential component of an estate plan. Moving assets into a trust may also lower your tax burden; however, the extent to which this occurs is contingent on the kind of trust you establish as well as the ownership status of the assets. The assets held in a revocable trust are still deemed to be your property, however the property held in an irrevocable trust is not.
INDIAN TRUST ACT, 1882 (often referred to as the “Trust Act”)
A “Trust” is a duty that is attached to property ownership that results from a confidence that is proclaimed and acknowledged by the owner on behalf of another party or on behalf of both the owner and another party, as stated in Section 3 of the Trust Act. This confidence can be on behalf of the owner alone or on behalf of both the owner and another party. As a consequence of this, a trust is a declaration that is made by the owner of the property that the property will be held in the future by him or another person (such as a trustee) for the benefit of someone else (referred to as the beneficiary), and that the property will be given to that person either immediately or in due course.
DIFFERENT KINDS OF TRUSTS
People are able to establish a wide variety of trusts for a variety of purposes. The majority of the time, however, trusts are either revocable or irrevocable and belong to one of those two categories.
A TRUST THAT IS REVOCABLE
In a structure that is revocable, the trustor is allowed to continue exercising legal ownership and administration of the trust’s assets. Because of this, the trustor would be responsible for paying taxes on the income that these assets create, and the trust itself may become subject to inheritance taxes if the value of the trust exceeded the threshold at which it was exempt from taxation at the time of the grantor’s death.
IRREVOCABLE CONFIDENCE
When the trustor establishes an irrevocable trust, the legal ownership of the trust’s assets is transferred to the trustee instead of the trustor. Nevertheless, this has the effect of removing such assets from a person’s estate, so reducing the portion of that estate that is subject to estate tax. In addition to this, the trustor gives up some of the powers that would normally allow them to change the trust instrument. For instance, once the beneficiaries of an irrevocable trust have been selected, the person who created the trust typically lacks the ability to change their selections. This is not the case if you have a trust that is revocable. Who actually owns the property when it is held in trust?
Despite the fact that the trust is in possession of assets that have been retitled into its name, the question of who officially owns the trust property for the purposes of tax filing and other legal matters is determined by the form of trust. Revocable trusts and irrevocable trusts are the two primary classifications of trusts, although there are many different kinds of trusts.
The grantor retains ownership of the trust property in the case of a revocable trust, also known as a grantor trust. Even if an asset has been legally transferred into the name of the trust, the grantor is still required to report any income or capital gains from trust assets on their personal income tax return. Furthermore, if the grantor is ever sued, the grantor’s creditors may attempt to seize property held in a revocable trust.
The trust itself is the sole owner of any property held in an irrevocable trust. From both a legal and a financial perspective, the grantor does not have any ownership ties to the assets in question. The trustee is responsible for filing tax returns on behalf of the irrevocable trust, which has its own individual taxpayer identification number. Any income tax that is owed by the trust is paid for out of the trust itself, not by the trustee or the grantor. Irrevocable trusts also provide asset protection, which means that the trust’s property cannot be taken away from the grantor in the event of a legal dispute.
The establishment of an irrevocable trust often necessitates the assistance of a qualified legal practitioner, such as an estate attorney. If you do not correctly establish the irrevocable trust, then you could be subject to unanticipated tax repercussions.
When a grantor passes away, what happens to the property that is held in trust?
When the trust’s grantor passes away, the trustee is responsible for either distributing assets to the trust’s beneficiaries or continuing to manage the assets in accordance with the trust document. If the grantor was simultaneously serving as the trustee, then the duties will be taken over by a successor trustee. It is not unusual for people to establish a trust fund or a family trust that continues to exist for a significant amount of time after the grantor has passed away. This is done with the intention of keeping a spendthrift beneficiary’s spending under control or providing a reliable income for a surviving spouse.
If the trust document does instruct beneficiaries to receive assets upon the death of the grantor, then the beneficiaries are able to obtain those assets without having to go through the process of probate.
Sources:
https://www.policygenius.com/trusts/what-is-trust-property/
https://aishwaryasandeep.com/2022/09/26/trust-owned-property/
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