ProDoc Forums - Grantor trust
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evydavis
USA
19 Posts |
 Posted - 12/28/2004 : 11:02:17 AM
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What language do you use to make the grantor (who is not a beneficiary of a trust) the owner of a trust for income tax purposes?
Evy Davis
469.467.0868 |
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Ronald Lipman
USA
499 Posts |
Posted - 01/03/2005 : 05:39:22 AM
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I typically will add language similar to the following (to be edited as required for the particular trust you are drafting):
A. Power to Add and Remove Beneficiaries. Until the death of the last to die of both of the Grantors, the Trustee (other than one of the Grantors, any descendant of the Grantors, or any beneficiary under this Article) may, in the Trustee's sole discretion, add any one or more of the then living grandchildren or more remote descendants of the Grantors as a beneficiary or beneficiaries of the trust created by this Article, and the Trustee may distribute to such beneficiary or beneficiaries such amounts of the income and principal of the trust as are necessary, when added to the funds reasonably available to them from all other sources known to the Trustee, to provide for their health, support, maintenance, and education, taking into consideration their age, education and station in life. Further, the Trustee (other than one of the Grantors, any descendant of the Grantor, or any beneficiary under this Article) may, in the Trustee's sole discretion, remove any such beneficiary previously added. Any beneficiary so removed shall have no further interest in this trust unless subsequently added as a beneficiary as provided in this Section. If each Trustee then serving is either (i) one of the Grantors, (ii) a descendant of the Grantors, or (iii) a beneficiary under this Article, then such other person or entity which is named in this instrument as a successor Trustee and which has the highest priority hereunder to serve among all successor Trustees herein named (other than one of the Grantors, any descendant of the Grantors, or any beneficiary under this Article), shall have the above described power to add and remove any one or more of the then living grandchildren or more remote descendants of the Grantors as a beneficiary or beneficiaries eligible to receive distributions. If each Trustee then serving is either one of the Grantors, a descendant of the Grantors, or a beneficiary under this Article, and (i) each successor Trustee herein named is either one of the Grantors, a descendant of the Grantors, or a beneficiary under this Article, or (ii) each successor Trustee herein named who is not one of the Grantors, a descendant of the Grantors, or a beneficiary under this Article is deceased or not in existence, then the spouse of the oldest living and married child of the Grantors shall have the power to add and remove all (but not less than all) of the then living grandchildren or more remote descendants of the Grantors as beneficiaries eligible to receive the distributions provided for above. The person or entity holding a power to add and remove beneficiaries described in this Section may at any time irrevocably renounce and release such power by a written acknowledged instrument, and such renunciation and release shall be binding on all persons or entities referred to in this Section, and thereafter no such person or entity shall have the power to add or remove any beneficiaries.
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Keith Davis
USA
52 Posts |
Posted - 01/05/2005 : 07:19:36 AM
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Evy and Ron,
Can one or both of you explain what action/power you are trying to create or take away via this language in order to make the grantor the owner of a trust for income tax purposes?
I see that the grantor apparently is not given the power to appoint beneficiaries or distribute income. Is that the key? Or is it the fact that beneficiaries can change? Thanks for the education.
Keith
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Ronald Lipman
USA
499 Posts |
Posted - 01/05/2005 : 08:41:35 AM
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There are a number of ways to make the Grantor of a trust the owner of the trust for income tax purposes, but not for estate tax purposes, commonly referred to as a "defective" trust. These tax laws exist in the 670's of the IRC. The language I gave is just one of the ways to make a trust defective.
The reason you would do this is so that the Grantor will be obligated to pay the income tax on the trust's earnings. The trust, therefore, builds up income tax free, and the Grantor's estate is diminished by the payments of the tax. Importantly, the payment by the Grantor of the income tax is not considered to be an additional gift to the trust. Obviously, this structure is not for every client, as many clients will tell you they are happy making the gifts, but the kids (or the kids' trusts) can pay the income taxes.
This is a very complicated area, and there are a number of CLEs that have been give at some of the advanced seminars that you may want to read to learn more. There was also a recent private letter ruling permitting this technique.
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Grantor trust
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