RENT Magazine Q3 '24

BASIC LIVING TRUST

Many people have a basic revocable living trust, typically for the purpose of avoiding probate in states like California where the probate process is expensive and time consuming. Basic trusts also provide for greater control over the disposition of one’s assets. In such trusts, the three parties to the trust – the Grantor, the Trustee, and the Beneficiaries – are all the same person or a married couple. As a result, the law (and more importantly, the IRS) generally disregards a basic revocable living trust during the lives of the grantor(s) who created it. For 1031-exchange purposes, the IRS will treat a rental property titled in a trust as owned directly by the grantor(s).

ALL TAXPAYERS SHOULD AVOID BUYING 1031-EXCHANGE REPLACEMENT PROPERTY FROM A RELATED PARTY.

“A/B” LIVING TRUST

An “A/B” trust adds an estate tax benefit by allowing both spouses to apply their lifetime estate tax exemption toward their children. In the absence of an “A/B” trust, the exemption of the first spouse to die is applied only to the surviving spouse, essentially wasting the opportunity to apply the exemption to the children. Upon the death of the first spouse, part of the “A/B” trust, known as the “bypass trust,” becomes irrevocable, meaning the surviving spouse cannot change the beneficiaries. However, the surviving spouse still receives the benefit of the assets in the bypass trust. The other part, often known as the “survivor’s trust,” continues to be treated for practical purposes as the unconditional personal property of the surviving spouse.

IRREVOCABLE TRUST

An irrevocable trust means just that—it can no longer be revoked. Such trusts either started as a revocable trust and became irrevocable when the grantors died, or the grantors intentionally made the trust irrevocable at the outset for purpose of moving an asset out of their estate. This may be done for estate tax reasons or liability protection or both. Unlike revocable trusts, irrevocable trusts are treated as a separate legal entity with their own taxpayer identification numbers.

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