What is the classification of a nonrevocable trust set up for the benefit of another person?

A nonrevocable trust established for the benefit of another person is classified as an asset disposed of for less than fair market value. This classification arises because, in the context of estate planning and financial assessments, a nonrevocable trust signifies that the grantor has transferred assets into the trust that are no longer under their control or ownership.

When assets are placed into a nonrevocable trust, they are typically intended for the long-term benefit of the beneficiary, and this often reflects a transactional value that is less than the market value when transferred. The trust can represent a financial obligation or a decrease in the grantor’s total net assets since the fund is essentially “given away,” thereby marking the transfer as an asset realized at a valuation potentially lower than what it could fetch on the open market.

The other classifications, such as income or liability, would not accurately describe the nature of a nonrevocable trust in this context. An income classification usually pertains to earnings generated from assets. In contrast, a liability represents a financial obligation or debt owed by the grantor or the estate. Thus, recognizing the trust as an asset disposed of for less than fair market value encapsulates the essence of this financial transaction.