Estate Tax Implications

• Because the grantor retains the power to change the terms of the trust at any time, the assets are still considered to be in the grantor's ownership. This means that when the grantor dies, the trust assets will be included in his gross estate and consequently, may be subject to estate tax liability. Not everyone will incur estate taxes, just those who have assets valued greater than the exemption equivalent.
  
  

Exemption Equivalent

• Each year, the government sets an amount that determines when estate tax liability will begin to incur called the exemption equivalent. The year 2010 was a strange one in that the estate tax was repealed; however, in 2011 it will be reinstated at a $1 million level and a maximum 55 percent tax rate. Congress can change these amounts anytime prior to the year starting. However, assuming an exemption equivalent is in place, if the trust assets (or in combination with the grantor's other assets) exceed the exemption equivalent amount, estate taxes begin to incur.
  
  

Marital Deduction

• If all assets in a trust pass to the grantor's spouse, then no tax will incur because of the marital deduction. This deduction allows for any amount to pass to a spouse at death free of any taxes. Taxes become due when the spouse dies. This is frequently used with living trusts.
  
  

Other Distributions

• Distributions to other individuals besides the spouse usually do not incur any taxes. For example, if a daughter receives distributions from her father's living trust, she will do so free of taxes. If the beneficiary is a grandchild or qualified "skip" person (someone two generations below the grantor) generation skipping tax could incur.
  
  

Irrevocable at Death

• Once the grantor of a living trust dies, unless otherwise specified in the document, the trust will automatically become irrevocable. This change in revocability does not provide the tax benefits of an irrevocable trust (not included in gross estate). No tax liability incurs from this change.