Articles

Will Grantor Trusts Become Extinct? by Jeffrey M. Mutnik, CPA/PFS


Posted on October 14, 2021 by Jeffrey Mutnik

If and when Congress passes a law reforming the tax code, there is a general expectation that taxes will increase, and some commonly used estate planning strategies will be added to the endangered species list. Among the tools being targeted are irrevocable grantor trusts, which have long enabled grantors to remove appreciating assets from their taxable estates.

Under current law, a grantor trust is treated as a disregarded entity for income tax purposes. Assets a grantor transfers into the trust are considered to be owned by the grantor for income tax purposes. The grantor remains responsible for reporting and paying tax on income generated by the trust. However, because transactions between the grantor and the trust are disregarded for income tax purposes, donors can sell assets to the trust and avoid the heartburn of tax on appreciation of those assets. Similarly, a grantor trust’s payment of interest on a promissory note owed to the grantor does cause income tax or net investment income tax to be paid by the grantor.

By contrast, proposed legislation making its way through Congress calls for assets held in an irrevocable grantor trusts to remain in the grantor’s taxable estates at the time of the grantor’s death. Moreover, it is possible that transactions between grantors and grantor trusts will be reportable and subject to income tax in the future.

If Congress changes the law to tax such sales or include the assets in the grantor’s taxable estate, the benefits of creating new irrevocable grantor trusts will be eviscerated. While existing grantor trusts may continue providing asset protection and other benefits for which they were created, future transactions between grantors and grantor trusts that pre-exist this contemplated law change may become subject to the same taxation as new grantor trusts. At this point in time, very little is clear. However, meeting with your financial advisors now can help you prepare for tax efficiency under various scenarios in the future.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.