Estate and Elder Law

Intentionally Defective Grantor Trusts Under Attack by 2013 Revenue Proposals

By:  David R. Schoenhaar, Esq.*

A 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.

Sounds 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.

According 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.

If 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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  • Anonymous
    As the original owner and having possession of my home In which I have lived for the last 10 years After researching extensively I have came to the conclusion that the trustee which is handling the trust of a dear friend that has passed in late 2011. My friend now deceased had purchased my home in 2009. Which in that time I was employed by my friend and had worked for this very trust having an agreement that I would have a life tendency as well as an option to repurchase my home at any time should I be able to being terminally ill and having poor health. The trustee has known of the circumstances all along and giving her testimony admitted that she was well aware of me having the option to repurchased my home. The property my home was put into the trust however the agreement in draft had not been signed by the deceased or myself only in verbal communication too many. The trustee served me with a unlawful detainer and filed a petition with the courts to sell the property disregarding the very purpose and intent that my friend purchased the home. The trustee continues to disregard and has no that's next or morals concerning my existence even though she is well aware of me being very ill. The courts awarded possession to the trustee and which I am appealing there is also another hearing concerning a life estate. I will request a stay be put in place however I have not been served with wit. Trustee has stopped making mortgage payments she is going full force with intent to dispose of me and my home by intentionally defective techniques and strategies. How can this be possible a trustee having fiduciary obligations which are required and stipulated by law. Intentional defective trustee has defaulted on mortgage payments diminishing the Trust properties and inflicting great harm considering my health conditions which she is well aware of yet continues to inflict great harm and extreme stress. Trustee has ethics or morals considering her actions. Intentionally inflicting great harm knowing I'm ill and disabled REALLY, so disposing of human life and deplete property value? What resources do I have to repurchase my home being default how can I address this CRITICAL matter. PLEASE READ (link) PETITION FOR A BETTER UNDERSTANDING OR PLEASE CALL ME THANK YOU. Please join this campaign: y-bullies-to-dispose-of-life-tenancy?share_id=hrLYZqpcHQ&utm_campaign=mailto_lin k&utm_medium=email&utm_source=share_petition Regards, Anthony Sanchez =============