Introduction: Trusts Are No Longer Optional for High-Net-Worth Planning
As families accumulate more wealth, especially in today’s volatile tax environment, having a basic understanding of trusts isn’t just helpful—it’s vital. Whether you’re a professional advisor or a high-net-worth individual navigating succession planning, the right trust structure can make the difference between preserving a legacy or losing it to taxes, lawsuits, or probate delays.
At Gulla CPA, we’ve seen firsthand how misused or misunderstood trusts can lead to missed opportunities and costly mistakes. This article breaks down the core differences between major trust types so you can guide (or build) a smart estate strategy with confidence.
Revocable vs. Irrevocable Trusts
🔁 Revocable Trust (Living Trust)
- Control: Fully retained by the grantor.
- Probate Avoidance: Yes.
- Tax Treatment: Income taxed to grantor.
- Asset Protection: None—assets remain reachable by creditors.
Common Uses
- Managing assets during incapacity
- Avoiding probate
- Simplifying transfers
🔒 Irrevocable Trust
- Control: Fully relinquished once executed.
- Estate Exclusion: Assets not counted toward taxable estate.
- Tax Treatment: Separate tax entity.
- Asset Protection: Stronger shield against creditors and lawsuits.
Common Uses
- Estate tax reduction
- Medicaid planning
- Special needs or charitable planning
Simple vs. Complex Trusts
✅ Simple Trust
- Must distribute all income annually
- Cannot donate to charity
- Cannot distribute principal
⚙️ Complex Trust
- Can retain income
- May donate to charity
- Can distribute principal
| Feature | Simple Trust | Complex Trust |
| Must distribute income | ✅ Yes | ❌ No |
| Can donate to charity | ❌ No | ✅ Yes |
| Can distribute principal | ❌ No | ✅ Yes |
| Tax burden | On beneficiaries | On trust or beneficiaries |
Key Note: A trust’s classification can change year to year depending on how it’s managed.
The Power of the IDGT: A Tool for Generational Wealth Transfer
An Intentionally Defective Grantor Trust (IDGT) is a unique tool that’s “defective” for income tax purposes—but powerful for estate and gift tax strategy. It allows the grantor to remove assets from their estate for estate tax purposes while still paying income tax on the trust earnings. This further reduces their taxable estate while preserving the trust’s full value for beneficiaries.
🔍 Why It Works:
- Estate Freeze: Asset growth occurs outside of the estate.
- Tax Burn: Grantor pays the tax, reducing their estate further.
- Valuation Discounts: Often used in business succession or asset transfers.
📘 Example:
- A business owner transfers a $10M business to an IDGT.
- $1M is seeded into the trust; $9M is sold via promissory note.
- Grantor pays income tax, allowing trust assets to grow outside the estate.
- End result: Business appreciation and tax savings stay with the family, not the IRS.
Final Thoughts: Equip Your Team, Protect Your Clients
As Gulla CPA moves deeper into serving high-net-worth clients, a working knowledge of these trust structures is no longer optional for anyone involved in tax planning. From revocable living trusts to IDGTs, these are not just legal tools—they’re foundational to building and protecting wealth for generations.
If you’re a tax professional, a financial advisor, or even a family office staff member, now is the time to level up your estate planning IQ. Your clients expect it. Their legacies depend on it.
