By: Martin M. Shenkman, CPA, MBA, JD
New IRS Ruling – if you have a grantor trust (e.g., GRAT, IDIT, etc.), you MUST visit your tax consultant and be sure you are in compliance. This is another head spinner, but an important one. We will simplify what we can to get you through it.
Grantor trusts are trusts for which the income is taxed to you, the person setting up the trust (grantor). This is really important in the context of a number of key estate planning transactions. For example, if you sell a large part of your real estate development business to a dynasty trust, if that trust is not characterized as a grantor trust, that sale could trigger gain for income tax purposes. A common mechanism to achieve grantor trust status is to provide that the grantor can substitute trust property in a non-fiduciary capacity for other property of equivalent value. This mechanism creates a host of concerns, one of which is whether the IRS would argue that this right would pull all trust assets back into your estate. The new ruling, Rev. Rul. 2008-22 indicates that this power alone (that does not mean you can not trip up elsewhere) will not cause estate inclusion (under IRC 2036 or 2038) if a list of requirements are met. The grantor expressly cannot be trustee (but what about being an investment adviser?). The grantor has to certify in writing that the substituted property is of equivalent value. Under state law, the fiduciary has the obligation to ensure that the properties are of equivalent value. The trustee has a duty to invest and manage trust assets impartially as to the various beneficiaries (no shifting of benefits). What happens if the assets include family business interests from which perquisites and salaries are paid is not clear. The trustee has an unrestricted discretionary power to acquire, invest, reinvest, exchange, sell, etc., trust property in accordance with standards provided by local law. How this may be applied with a trust investment adviser serving, or if the grantor is the investment adviser, or if the trust has restrictions on selling a family business, is not clear.
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