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David R. Schoenhaar, Esq.*
common Estate Planning technique is the utilization of intentionally defective
grantor trusts. A grantor trust is a
trust in which the grantor is treated as the owner for income tax purposes and when
the grantor dies, the trust is often drafted in a manner to avoid inclusions in
the grantor's estate for estate tax purposes.
The grantor's payment of the income taxes is in effect an annual tax free
gift to the trust, which allows the trust assets that would otherwise be
utilized to pay the tax burden, to stay in the trust and grow. Also, since transactions between the trust
and the grantor are ignored, there is no income tax event when the grantor sells
a low basis asset to the grantor trust.
too good to be true? Apparently the
Obama Administration thinks so because their Fiscal Year 2013 Revenue Proposals
contain a provision to include grantor trust assets in the grantor's
estate. The reasoning for this radical
proposal is to coordinate the income and transfer tax rules and prevent this
type of planning which can lead to the transfer of significant wealth by the grantor
without transfer tax consequences.
to the proposal, if a grantor is treated as an owner of a trust for income tax
purposes (1) the trust assets would be included in the gross estate of the
grantor for estate tax purposes, (2) distributions from the trust to a
beneficiary during the grantor's life would be subject to gift tax, and (3) if
at any time during the grantor's life the grantor ceases to be treated as an
owner of the trust for income tax purposes, the remaining trust assets would be
subject to gift tax. The proposal would
be effective with regard to trusts created on or after the date of enactment
and with regard to any portion of a pre-enactment trust attributable to a
contribution made on or after the date of enactment.
you are an estate planning attorney you are probably thinking about all the
grantor trusts that you have drafted in the past and are in the process of
drafting. Like many of the other Obama
Administration proposals this one is likely to be met with significant
resistance. However, this is certainly a
proposal that needs to be followed as it would significantly change estate
planning as we know it.
*David R. Schoenhaar,
Esq., is an associate at Ruskin Moscou Faltischek, P.C. and is a member of the
firm's Trust and Estates Planning and Litigation Department.
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