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Jul 14, 2010
The Vocabulary Of Trust

The use of trusts in asset protection is quite popular but the distinctions between a revocable and irrevocable trust are important to understand. In an irrevocable trust, possession of the asset is transferred to an independent trustee; the original possessor is no longer tied to them. Thus, for 1031 exchange purposes the irrevocable trust has a separate tax identification number. Therefore, in compliance with the same taxpayer rule, a revocable trust can be used interchangeably with personal ownership but an irrevocable trust cannot.

Here is a table further illustrating the differences:

Features/Benefits	Revocable Trust	Irrevocable Trust
Asset Protection	No Asset Protection. The Grantor, Trustee, and Beneficiary same person for tax purposes.	Yes. The Grantor no longer owns the assets. Assets have been transferred to the independent Trustee who has a fiduciary duty to manage the assets for the benefit of all beneficiaries, which may include the Grantor. There is a different tax ID number.
Eliminate Probate	Yes.	Yes.
Helps Eliminate Estate Taxes	No.	Yes. Assets are not subject to the Estate Tax. The deceased did not "own" the assets or have assets in his possession at the time of his death.
Comments:	Can be added to a replacement property in a 1031 exchange when an individual is the taxpayer doing a 1031.	Cannot be added to a replacement property in a 1031 exchange when an individual is the taxpayer doing a 1031.

In summary, the overarching “same taxpayer rule” governing 1031 exchanges mandates that the same taxpayers who sells the relinquished property buy the replacement property. So, when selling as a revocable trust, you can buy personally or vice-versa without violating the rule. Conversely, if an irrevocable trust sells property it too can do a 1031 exchange but the irrevocable trust (and not a beneficiary or grantor) has to do the 1031 exchange.

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