Grantor Trusts and Estate Planning #retirement

Grantor Trusts 101

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Recently, the Obama Administration proposed a change to the laws regarding grantor trusts. If the new tax takes effect, all grantor trusts will be included in the grantor’s estate. That’s the bad news. The good news is that transfers to grantor trusts that happen prior to when any new legislation takes effect would likely be grandfathered in. If you’re considering using a grantor trust as part of your estate planning strategy, the time to act may be now, before the law changes.

What Is a Grantor Trust?
A grantor trust is an irrevocable trust that has been designed to be excluded from the grantor’s estate. The income from the trust, however, is taxable to the grantor. For many years, these trusts (which are sometimes referred to as “intentionally defective grantor trusts,” or IDGTs, since a flaw is included on purpose) have been a both a popular and valuable estate planning tool. Typically, children or grandchildren are named the beneficiary of the grantor trust.

Why Use a Grantor Trust?
A grantor trust has a number of possible uses. I’ve outlined two examples below.
• Some people may use a grantor trust to “freeze” the value of the asset in the grantor’s estate, if the asset is likely to appreciate significantly.
• Another option is to use a grantor trust as an irrevocable life insurance trust (ILIT). This could possibly be funded with assets in addition to the life insurance so that the insurance premiums could be paid with income from the trust.

Three Advantages of a Grantor Trust
There are three possible advantages of using a grantor trust in the way I’ve described above.
• Preserve gift tax exclusions. When a grantor pays tax on the trust income, it has the same estate tax effect as a gift to the trust beneficiaries. However, it does not consume any of the grantor’s annual gift tax exclusions ($14,000 per gift recipient) or the grantor’s lifetime gift tax exemption of $5.25 million (in 2013).
• Not tax on interest received from the trust. When a sale is made to a grantor trust, no gain is recognized by the grantor, since the grantor and the trust are the same taxpayer. Thus, the grantor is not taxed on interest received from the trust.
• Avoids the three-year inclusion rule. When an existing life insurance policy is sold to a grantor trust, you can avoid the three-year estate inclusion rule that applies to the gift of a policy. The sale is considered a transfer to the insured, and as a result no “transfer for value” exists.

Act Now!
If you want to take enjoy the benefits of a grantor trust, the time to act may be now. By making transfers to the trust prior to any changes in the law, you’ll be take advantage of this estate planning technique. Of course, as with any complicated estate planning decision, it’s wise to consult with your professional advisors (including an estate planning attorney and a financial advisor) before you make a decision. They can talk to you about whether a grantor trust is a good choice for you and offer advice on how to set up such a trust.

By Chris Cooper, CFP®

Jacqueline Maddison

Jacqueline Maddison

Jacqueline Maddison is the Founder and Editor-in-Chief of Beverly Hills Magazine. She believes in shining light on the best of the best in life. She welcomes you into the world of the rich and famous with the ultimate luxury lifestyle.

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