I was taking a quiz and this question had me stumped.
Testamentary trust ARE subject to probate. The answer should be I only OR the language in choice II needs to change and omit “not”. Unless I’m completely reading this wrong?
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Hi @CatNoelle! Thanks for pointing this out. As the explanation says, testamentary trust are subject to probate. This was a typo on our end, and we’re updating the question now.
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I thought all trusts are not subject to probate and may reduce estate tax. I don’t think you can totally eliminate estate tax. Please correct me if I am wrong. Irrevocable reduce estate tax and lost control of the trust once is written. Revocable allows changes and distribution of income while living, so the accumulation may keep at the same level or less estate tax at time when grantor dies. Revocable retain full control of the trust and can change anytime. Will on the other hands, is only instruction and cannot avoid probate.
I thought I, II and IV are right. Please confirm. Thanks.
Hi @A11 - you’re mostly right. I’ll break down your comment line by line. For reference, all of this is covered in the Trusts chapter.
I thought all trusts are not subject to probate and may reduce estate tax. I don’t think you can totally eliminate estate tax.
All trusts except for testamentary trusts avoid probate. Testamentary trusts are written into a person’s will, and wills are validated by the probate court. In regards to estate tax, irrevocable trusts avoid estate taxes as they are considered their own entity (trusts don’t die). Revocable trust assets are still considered assets of the grantor, and therefore are subject to estate taxes upon death of the grantor.
Irrevocable reduce estate tax and lost control of the trust once is written.
It would be more accurate to say irrevocable trusts are not subject to estate taxes, but I get what you’re saying. And yes - the grantor loses the ability to change the trust once it becomes irrevocable.
Revocable allows changes and distribution of income while living, so the accumulation may keep at the same level or less estate tax at time when grantor dies.
I’m not sure I completely understand the last part of the statement, but revocable trust assets are assets of the grantor. Upon the death of the grantor, revocable trust assets are subject to estate taxes.
Revocable retain full control of the trust and can change anytime.
Yes - the grantor retains full control of a revocable trust, allowing them to change the parameters of the trust at any time (until the grantor dies).
Will on the other hands, is only instruction and cannot avoid probate.
Wills can be changed by the person that created them, but yes, they are only instruction and always are part of probate.
I thought I, II and IV are right. Please confirm. Thanks.
IV (income distributed from irrevocable trusts is taxable to the trust) is not correct. Irrevocable trusts are taxed in one of two ways:
- If income is distributed = taxable to beneficiary receiving income
- If income is reinvested in trust = taxable to the trust
Because the statement clearly says ‘income distributed,’ it is taxable to the beneficiary that received the income. Not the trust.
I hope this helps!
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Awesome. That’s very clear and very helpful. Again, I am not too comfortable with the differences between the inter-vivos and the testamentary trust. I know inter-vivos trust is during the grantor’s life time whereas the testamentary trust does not even come into effect until grantor dies. However, what’s the difference between inter-vivos trust and revocable trust? Are they the same as “living trust”? The definitions seem to be bury. Please help. Thanks.
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Hi @A11 - sorry for the delay in response.
An inter-vivos trust is a living trust, established when the grantor is alive. They can be revocable or irrevocable. You can have a revocable living trust or an irrevocable living trust. Both are established when the grantor is still alive, but one can be changed or revoked (revocable trust) and one is set in stone when established (irrevocable trust). Testamentary trusts are established when a death occurs.
I hope this helps!
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