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By John R. Merlino Jr. Esq.
Founding Attorney

Good financial and estate planning can help you care for your family after you pass away or become incapacitated. A skilled estate planning lawyer helps you learn what kinds of legal protections you need to ensure that most of your assets go where you want them to and not to the government through taxes. 

A non-grantor trust helps in cases where you wish to reduce taxes on certain assets. Let’s look more closely at the advantages of a non-grantor trust. 

What is a non-grantor trust? 

A non-grantor trust is one in which the grantor, or person establishing a trust, relinquishes control of the trust and its assets. A grantor can open the trust and place assets in it. The trust is structured such that the grantor does not legally own the assets. As a result, they cannot change the terms of the trust, alter the payouts to beneficiaries, or end the trust. 

Who benefits from a non-grantor trust? 

Non-grantor trusts may be used to benefit persons other than the grantor or in cases where the grantor no longer wants further ownership of its assets. For example, a non-grantor trust may be used to benefit children or a former spouse without tax obligations for the grantor on its assets. 

The grantor no longer pays tax on any income earned for the trust. For example, suppose that you place $50,000 in the trust and set it up so that the trustee (the person responsible for administering the trust) invests the money. In that case, any gains those investments make are not part of the grantor’s tax obligation. 

Non-Grantor Trusts for Business Owners

New York business owners may want to establish a non-grantor trust to take advantage of the qualified business income (QBI) deduction. A business owner can deduct up to 20% of eligible business income if they fall below a certain threshold. Business wonders can also decide up to 20% of real estate investments with the same income cap level. 

A non-grantor trust may be used to reduce the business income considered for QBI eligibility when the business owner places a certain amount of income or business assets into the trust. At that point, the business becomes eligible for the QBI deduction because the grantor (the business) no longer controls the assets in the trust. 

Make Sure the Transfer of Assets to the Non-Grantor Trust Is Incomplete

Usually, trust assets are transferred completely, and the grantor makes a subsequent taxable gift to the trust beneficiaries. However, if it is established as an incomplete non-grantor trust, the person establishing it avoids maxing out their estate tax and lifetime gift exemptions. 

Does a non-grantor trust pay income tax? 

Yes. Although the grantor is exempt from being taxed on assets contained in the non-grantor trust, the trust itself still pays income taxes on its assets and any gains the assets produce. Once the trust reaches $12,700 of taxable income, it’s taxed at the highest bracket — currently 37%. 

Drawbacks to a Non-Grantor Trust

Although there are multiple advantages to this type of trust, a non-grantor trust does have a couple of drawbacks. First, the grantor no longer controls what happens to the assets in the trust. The trustee administers the terms according to what the grantor sets, but once the assets are in a non-grantor trust, they’re no longer yours. 

Second, there could be tax liability if you make future financial transactions with the trust. Now, you and the trust are two separate entities, as the IRS sees it, so both parties could owe tax. 

Do you need help setting up a non-grantor trust? 

For more information on how a non-grantor trust can benefit you — and for any other estate planning advice — contact the estate planning attorneys at Merlino & Gonzalez of Staten Island, NY, today.

About the Author
John is a fierce advocate and the office guru for problem-solving and brainstorming. He guides clients through every stage of a real estate transaction from offer to contract, navigating through nerve-shattering home inspection and title clearance concerns, maintaining constant contact with lenders, conducting the actual closing, and continuing to advise clients with regard to any post-closing concerns.  John brings a practical and fair-minded approach to the process which has earned him the respect of his clients and peers.