What's a Grantor Trust?

Posted On: May 14, 2007 by Joel A. Schoenmeyer

Sometimes it seems like estate planners just invent terms and acronyms to confuse people. One of these cases involves a grantor trust, sometimes called an "intentionally defective grantor trust" or an IDGT.

So what's the deal with these things?

Basically, the term "grantor trust" relates to the taxation of a trust's income. Who pays the tax? If a trust is a grantor trust, then the grantor pays the tax (otherwise, the trust and/or its beneficiaries must have to pay the tax).

The grantor trust rules can be found here in the Internal Revenue Code (the "Code").

Estate planners use the grantor trust rules to take advantage of inconsistencies in the Code. In this case, the inconsistency is that you can set up a trust that is owned by you for income tax purposes (you pay the income tax) but not owned by you for estate tax purposes (the trust assets aren't includable in your estate).

Why would you want to do this? Because being viewed as the owner of a trust you set up means that you can pay the trust's income tax without such payments being considered an additional gift to the trust.

A revocable or living trust of which the grantor is acting as trustee will always be a grantor trust. The tax advantage discussed above is focused on irrevocable trusts (such as insurance trusts or gift trusts). Usually the goal of such trusts is to make sure that the grantor (i.e. the person who set up the trust) DOESN'T have any ownership interest in the trust. But there are certain provisions that can be included so the grantor can pay the trust's taxes. The term "intentionally defective" is misleading, since I don't think it's possible for a draftsperson to include grantor trust provisions by mistake (a more typical problem involves an inexperienced draftsperson who screws up the estate tax benefit by allowing the grantor to retain too much ownership interest in the trust).

I think the most typical provision used to make a trust a grantor trust involves giving a grantor "power to reacquire the trust corpus by substituting other property of an equivalent value" under Section 675(4)(d).

Posted by Joel A. Schoenmeyer | Permalink | Email This Post

Estate Planning Myths & Misconceptions – Myth #3 – An Estate Plan Is Not A Will

Estate Planning Myths & Misconceptions – Myth #3 – An Estate Plan Is Not A Will: "

Most people think of “doing estate planning” as the act of creating and signing a will. While in some cases, a will is the best instrument, you can’t get to that answer without engaging in a comprehensive process where the lawyer gets to learn about you and your family, your goals and desires, your values and expectations. Only then can an effective estate planning attorney recommend the best document or set of documents to create an estate plan that “works” for you.

While it is a near certainty that some day you will die (notice how a good attorney never lets himself get painted into a corner), the truth is that you will more likely experience a long-term disability than a catastrophic death. If all you have is a will, you’ve done nothing to plan for that disability. A comprehensive approach will include planning for your disability as well as your passing.

In the end, estate planning should be about giving you the control and flexibility to live your life with peace of mind, knowing that there are safeguards in place that will help you provide for your loved ones if you are disabled. An effective estate plan will let you give what you want, to whom you want, when you want them to have it, and in the way you want them to have it. All the while providing a way to allow you to pass along your wisdom with you wealth.

Posted by Victor Medina

Medina, Martinez & Castroll, LLC

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Estate planning basics

Estate planning basics: "

A CNN Money/Fortune Magazine article published yesterday gives a basic overview of some estate planning fundamentals. See How to avoid the ‘death tax’ by Janet Morrissey, 6/4/09.

As we’ve mentioned, although the estate tax is set to expire at the end of 2009, Congress is expected to pass new legislation that will keep the estate tax rate at 45% with a $3.5 million exemption.

Morrissey’s article touches on gifts, life insurance, irrevocable trusts such as life insurance trusts and GRATs (grantor-retained annuity trusts), and using limited partnerships to reduce the value of assets for tax purposes. Although the article does not mention it, the Obama Administration recently proposed restricting the use of GRATs and valuation discounts going forward, so the time to take advantage may be now.

The article also stresses the importance of periodically reviewing your estate plan. Finances, relationships, and laws change over time, and an estate plan created ten years ago may no longer make sense.

Special thanks to Yonina Elnadav for bringing the article to my attention.

SE

Related posts:

1. Life insurance basics
2. Common sense estate planning: Get Organized!
3. Estate planning during a recession
4. Estate Planning, Halacha and the Jewish Law of Inheritance
5. Estate Tax: The Baucus Proposal

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Successful small business succession planning

Successful small business succession planning: "

Statistics show that nine out of ten small businesses are family owned and operated; no big surprise there. After all, isn’t a start-up virtually by definition a family business? Indeed, what small business can be founded without some involvement, if not a lot of sacrifice, from the family members?

But when the founders ultimately decide to take their leave, orderly transfer of management and ownership to next generations breaks down significantly. In fact, less than one third of small businesses are transferred to family, and that number includes those that work and those that don’t.

In a past career as a business consultant, often working with families who work together in their businesses, I discovered at least two important small business succession planning truths:

1. The only thing harder than founding and growing a small business successfully is transitioning management and ownership successfully from the founder to the next generation of family.

2. The percentage of succession success increases with any combination of these three elements: higher management sophistication; high degree of respect among the parties; counsel from a family-business transition professional.

One family business transition I’ve observed, merely as an interested party, is the company founded by my friend, Tim Berry, a member of my Brain Trust and founder of Palo Alto Software, the makers of Business Plan Pro. All of his five children have worked in the company to some degree over the years, and earlier this decade he turned over the management reigns (not sure about any ownership transfer) to a middle child, daughter Sabrina.

From what I can tell, this transition is making all parties happy. With regard to my second point above, I’m not sure how much professional assistance they’ve sought, but I do know that Tim and Sabrina clearly fit the other two criteria of sophistication and mutual respect.

Recently, Tim joined me on my small business radio program, The Small Business Advocate Show, as we talked about some of the key elements of succession planning. He’s been the world’s top business planning guru for a long time, but he has become a family business transition expert in the last few years. Take a few minutes to listen to his words of wisdom. And, as always, be sure to leave your thoughts. Find interviews with Small Business Experts on the Small Business Advocate show

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Case Study: Using the Charitable Remainder Trust to Simulate a Charitable Lead Trust

Case Study: Using the Charitable Remainder Trust to Simulate a Charitable Lead Trust: "Most charitable remainder trusts are created with the intention of providing an income stream to the donors for their lifetimes with the remainder passing to charity at the conclusion of the trust term. In this case study, Mr. and Mrs.  Allen take advantage of a seldom used option that enables them to provide current annual gifts to charity as well.

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Heard on the Web: Philanthropy or Spite?

Heard on the Web: Philanthropy or Spite?: "

From our friends at Trusts & Estates comes an article on a topic based on a real life case that many planners must unfortunately confront. There's no gentle way to couch it: "Is my client giving their estate to charity because they are philanthropic or because they would rather give it to anyone other than to their heirs?"

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Reformation of CRT to Correct Drafting Error Not Self-Dealing

Reformation of CRT to Correct Drafting Error Not Self-Dealing: "The Service has ruled privately that a proposed judicial reformation of a charitable remainder unitrust to remove a net income with makeup provision will not constitute an act of self-dealing as defined in section 4941 of the Code. According to affidavits submitted by the parties, the drafting error was based on a misunderstanding as to the liquidity of the trust's underlying assets. Read on to see how this could have been prevented.

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Jack Welch: “No Such Thing as Work-Life Balance”

Jack Welch: “No Such Thing as Work-Life Balance”: "Whether work-life balance is attainable or is a myth has been a hot topic here at the Juggle. Adding fuel to the fire is former General Electric CEO Jack Welch. According to my WSJ colleagues Cari Tuna and Joann S. Lublin, Mr. ..."

The Need for an Advanced Medical Directive

The Need for an Advanced Medical Directive: "According to Rachel Emma Sullivan, Make Time to Create an Advance Medical Directive, WSJ, Aug. 20, 2009, An advance medical directive typically has two parts: a health care proxy and a living will. The healthcare proxy, or power of attorney..."

Trusts_Estates: JDSupra: Estate Planning Questions And Answers http://bit.ly/4locK7

Trusts_Estates: JDSupra: Estate Planning Questions And Answers http://bit.ly/4locK7: "Trusts_Estates: JDSupra: Estate Planning Questions And Answers http://bit.ly/4locK7"

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