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An “A/P TRUST” is nothing more than an unchangeable (irrevocable) to the outside world “CONTRACT” between the person who wishes to protect his property (the Grantor) the person who will manage the money (the Trustee) for the benefit of all Beneficiaries which may include the Grantor, his spouse, children and grandchildren.
The Contract requires the transfer of property from the original owner (Grantor) to a legal entity for the purpose for which the Contract was created.
What’s the distinction between Grantor, or Non Grantor?
A Grantor Trust take a special place within the tax code and for tax purposes is treated as a disregarded legal entity. The disregarded entity is “Income Tax Neutral” meaning that the original Grantor retained strings attached so that for purposes of the IRS he retains the property in his complete control, thus he did nothing for the purpose of protecting your property. Income tax benefits and income tax expenses are retained by the Grantor, thus he pays income taxes on the income of the entity. It’s a “pass-through” to his form 1040 i.e. real estate tax deduction and mortgage interest deduction on his person income tax return.
Revocable or Irrevocable, what does that mean?
Revocable is when the original person with the property transfers (repositions) the property to the entity with strings attached. The Grantor, the Trustee, and the beneficiary are the same person. Effectively you have kissed yourself on the hand and blessed yourself as the Pope. A revocable trust does absolutely nothing for protect your wealth. Many lawyers recommend revocable versions for avoiding probate, recognizing that the entity is not worth the paper it’s written on for protecting assets against frivolous lawsuits and the avoidance of estate taxes.
An irrevocable version is when the Grantor (the person with the money) gives-up complete control to an independent Trustee who in turn will use his judgment as Trustee to manage the property for the beneficiaries. The fiduciary relationship of the Trustee is to the protection of the assets at any cost. The Trustee must protect and must diligently invest under the prudent man rules, he cannot ever deal for himself. The courts do not look favorably on dereliction of duties while serving as Trustee. An irrevocable version is the only significant method to protect assets and for avoiding frivolous litigation, avoiding the probate process, avoiding estate taxes, and is the only device for avoiding the mandatory spend-down provisions for qualifying into a nursing home.
A domestic irrevocable A/P entity when combined with a Limited Liability Company is an impenetrable fortress, short of a foreign entity. A foreign entity is the Rolls Royce of asset protection – it’s expensive to set up and maintain, while the domestic irrevocable version with an LLC is the Tesla – not inexpensive to set up, but very low maintenance costs while providing 99.8% of the protection of the foreign version.