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Estate Planning Alert: Advantages of Grantor Trusts

3/12/13

Grantor trusts (sometimes referred to as "intentionally defective grantor trusts," or IDGTs) have been a popular and valuable estate planning technique for many years. A typical grantor trust is an irrevocable trust which is designed to be excludable from the grantor's estate, but the income of which is taxable to the grantor. Such a trust may be useful for purposes such as the following:

1. As the purchaser, for an installment note, of an asset owned by the grantor and likely to appreciate significantly, the objective being to "freeze" the value of the asset in the grantor's estate.

2. As an irrevocable life insurance trust (ILIT), perhaps funded with assets in addition to the life insurance so that the income of the trust can be used to pay premiums.

The advantages of a trust such as the above being a grantor trust are as follows:

1. The grantor's payment of tax on the trust income has the same estate tax effect as a gift to the trust beneficiaries, but without consuming any of the grantor's annual gift tax exclusions of $14,000 per donee or the grantor's lifetime gift tax exemption of $5,250,000 (in 2013).

2. In a sale to a grantor trust, since the grantor and the trust are the same taxpayer, no gain is recognized by the grantor, and the grantor is not taxed on interest received from the trust.

3. In a sale of an existing life insurance policy to a grantor trust to avoid the three-year estate inclusion rule that applies to the gift of a policy. Because the sale is treated as a transfer to the insured, there is no "transfer for value."

The Obama Administration has proposed a change in the law to make all grantor trusts includable in the grantor's estate. However, transfers to grantor trusts prior to the effective date of new legislation would almost certainly be grandfathered. Therefore, time may be of the essence for individuals considering the use of a grantor trust.

Should you have any questions regarding grantor trusts, or any other estate planning techniques, please contact one of our estate planning attorneys.

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