EXCHANGE RESOURCES, INC.
PRESERVING YOUR TAX BENEFITS: UNDERSTANDING HOW REVOCABLE AND IRREVOCABLE TRUSTS IMPACT 1031 EXCHANGES
The main difference between a revocable trust and an irrevocable trust is the degree of control that the person creating the trust (the “grantor”) has over the assets in the trust. A revocable trust, also known as a living trust, is a trust that can be modified, amended, or terminated by the grantor during their lifetime.
This means that the grantor retains control over the assets in the trust and can change the terms of the trust as needed. The assets in a revocable trust are generally considered part of the grantor’s estate for tax purposes, which means the grantor must pay any and all capital gains taxes reflected on their personal tax return.
An irrevocable trust, on the other hand, is a trust that cannot be modified, amended, or terminated by the grantor once it has been established. The assets in an irrevocable trust are generally considered separate from the grantor’s estate for tax purposes and generally have a separate tax ID number.
It’s important to note that the eligibility for a 1031 exchange is based on the ownership of the property, not the ownership of the trust. If the trust is the owner of the property, it must meet the eligibility requirements for a 1031 exchange, regardless of whether it is revocable or irrevocable. It’s also important to work with a qualified tax or legal professional to ensure that the trust is structured correctly and that all eligibility requirements are met.
Fact: Unlike a Revocable Trust, an Irrevocable Trust may not provide a step-up in basis upon death. This may affect your estate planning goals and require additional work to accomplish a 1031 Exchange.