Intentionally Defective Grantor Trusts on the Chopping Block?


Persons who have relied upon certain trusts as a means of limiting estate taxes upon their death might have cause for concern regarding an Obama administration budget proposal for 2013. While the current proposal remains very broad, and thus might be subject to change down the road, as it stands now, it would require those who set up “grantor trusts” to include trust assets in their own estates for estate tax purposes.

Current tax policy effectively keeps income tax rules and estate tax rules separate. With proper planning, a trust grantor and an irrevocable trust can be treated as the same person under income tax law, meaning that transfers between the two do not trigger an income tax. Meanwhile, trusts designated as grantor trusts can be designed to be separate from the grantor for estate tax purposes and, thus, no estate tax is paid on assets held in these trusts upon the creator’s death.

These trusts are often called “intentionally defective grantor trusts, and are used in sophisticated estate and asset protection planning. Particularly in recent years, many people have relied upon these distinctions to avoid or minimize income and estate taxes. Under the current administration’s proposed policy, this type of planning would no longer be possible.

There’s no real cause for alarm yet, however, as the current state of affairs in Washington most likely prevents any action in the near future.

Herman-Giddens, JD, LLM, TEP, CFP, Attorney at Law (NC, FL, TN),
Board Certified Specialist in Estate Planning and Probate Law (NC). North
Carolina Registered Guardian, Solicitor, England and Wales. Follow
his blog, North Carolina Estate
Planning Blog.


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