Ep. 103: Grantor vs. Non-Grantor Trusts: Tax Strategies for Wealth Preservation

Trust planning can be overwhelming, especially with tax laws that seem to change constantly. But understanding the ins and outs of grantor and non-grantor trusts is key to making smart decisions about your wealth and legacy.

In this episode of the Live Life Liberated podcast, Kyle Malmstrom from Centura Wealth Advisory and Adam Buchwalter from Wilson Elser break down the differences between grantor and non-grantor trusts, and how they can be used to optimize your income and estate tax strategies.

What Are Grantor and Non-Grantor Trusts?

At the most basic level, trusts fall into two categories when it comes to taxes: grantor trusts and non-grantor trusts. Both types of trusts are designed to move assets out of your taxable estate, but they handle taxes in very different ways.

A grantor trust is treated as if the grantor (the person who creates the trust) still owns the trust’s assets for tax purposes. This means that all the income generated by the trust is reported on the grantor’s personal tax return.

“A grantor trust is, in essence, invisible to the grantor. All income is reported on the grantor’s personal tax return, while the trust grows tax-free.” – Adam Buchwalter, Wilson Elser

While the grantor pays taxes on the income generated by the trust, the trust itself is not taxed on the money it earns. The key benefit here is that the trust can grow without being burdened by taxes, helping assets compound over time.

In contrast, a non-grantor trust is a separate tax entity. It gets its own tax identification number and must file its own tax returns. Non-grantor trusts are taxed at their own rates, which are generally higher than individual rates, and any income the trust generates is taxed within the trust.

The Upside of Grantor Trusts

Grantor trusts can be a great way to accelerate wealth growth, especially for those looking to pass wealth on to future generations without the drag of taxes.

“Because the grantor pays the taxes, the trust can grow faster without the drag of taxes. This payment is not considered an additional gift to the trust.” – Adam Buchwalter

By paying the taxes on the trust’s income, the assets in the trust are free to grow without being diminished. This can be especially helpful when you’re looking to pass down wealth to heirs, as it allows the trust to accumulate more value over time. It’s also a powerful tool in estate and asset protection planning.

That said, there are some things to keep in mind. Legislative proposals, like those in Senator Elizabeth Warren’s bill and President Biden’s Green Book, could change how grantor trusts are taxed. These changes might limit the benefits of grantor trusts, particularly for future contributions.

Why Go With Non-Grantor Trusts?

Non-grantor trusts offer a different set of benefits that can be especially helpful for individuals in high-tax states or those looking to maximize their tax efficiency.

“By domiciling the trust in a state like Nevada, where there’s no state income tax, you can save millions on transactions like the sale of a business or stock.” – Adam Buchwalter

For example, if you live in a high-income tax state like California, a non-grantor trust can help you avoid those state taxes by setting up the trust in a state with no income tax, such as Nevada or Delaware. This can lead to significant savings, particularly when selling assets like a business or stocks.

Non-grantor trusts also tend to be more insulated from changes in tax laws. While grantor trusts are more directly affected by tax law changes, non-grantor trusts are taxed as separate entities, which can provide more stability in the face of potential legislative shifts.

Why the Time to Act Is Now

Given the potential changes in tax regulations, now is the perfect time to consider your trust planning options. With proposals that could impact the tax treatment of grantor trusts, it may be wise to set up or fund your trust before any new legislation is passed.

“This may be your last planning opportunity. Talk to your advisors now to ensure your trust is set up properly and aligns with your goals.” – Kyle Malmstrom, Centura Wealth Advisory

Talking to your financial and legal advisors now can help ensure that your trust is set up in a way that takes full advantage of current tax rules. Whether you’re setting up a new trust or making changes to an existing one, getting proactive now can protect the benefits you currently enjoy.

Trust Strategies Tailored to Your Family

No two families are the same, and your trust planning should reflect your unique financial situation. Whether your focus is on minimizing taxes, preserving your wealth, or supporting charitable causes, it’s important to have the right strategy in place.

A custom trust strategy can help optimize your income tax savings, minimize estate taxes, and support your philanthropic goals. The right advisors will help you navigate the complexities of trust planning and ensure that your strategy fits your family’s needs.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Read on to learn more about our 5-Step Liberated Wealth Process and how Centura can help you liberate your wealth.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein.  All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.

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