There is currently a huge hot topic regarding proposed, impending changes to the Estate Planning and tax world. To catch you up to speed, Estate Planning is the process of working with an attorney to create a legally-binding plan for what will happen to your belongings, property, and remaining money after you pass away. Those things you have and intend to leave behind are your assets.
Estate Planning can be accomplished through a variety of methods, including making a Trust. A Trust is a fund created by someone with the intention to be passed along to someone else at the time of their death. The assets in the Trust are managed by a third party, rather than the creator or beneficiary of the Trust. Unlike assets distributed with a Will, assets placed in a Trust will be given immediately to the chosen recipient (known as the beneficiary) at the time of the Trust creator’s death.
There are many different kinds of Trusts, which all serve different purposes. There are Trusts specifically for helping loved ones with special needs, charitable organizations, or spouses from a foreign country. One person can create multiple Trusts for multiple purposes and different assets.
The type of Trust at the center of the potential law changes is known as a Grantor Trust. A Grantor Trust is specifically created to help the creator (known as the grantor) with tax planning purposes. A Grantor Trust is one where the grantor retains some level of control over the Trust in question, resulting in the assets still being considered owned by them for tax purposes (rather than owned by the Trust as an unrelated third party.) The “level of control” retained could be anything from a Revocable Trust where the assets can be returned to an Irrevocable Trust with the Power of Substitution, where the grantor retains the ability to change who the intended beneficiary is.
Grantor Trusts have been historically desirable because of a mismatch in how they are treated by separate income tax and transfer tax laws. This allowed someone to create an Intentionally Defective Grantor Trust, where the assets placed in the Trust are considered owned by them for federal estate tax purposes, but not for federal transfer tax purposes. Basically, your beneficiary will pay the least amount of money possible in tax when they receive the Trust, but you will still receive the most amount of money back from the IRS, and be able to make changes to the Trust without having to note them.
The proposed changes would basically remove this loophole. They would align the income tax and transfer tax rules as they relate to Grantor Trusts, where grantors would have to acknowledge the Trusts and pay proper taxes on them in order to receive the tax benefits. The changes would only apply to new Grantor Trusts, as old ones would be grandfathered in under the old rules. These potential changes have led to an arms race of people wanting to create Grantor Trusts before the new rules may take effect.
What exactly will the changes to Grantor Trusts be, and when will they take effect? Stay tuned to this space for updates. In the meantime, if you are interested in creating an Estate Plan and a Grantor Trust as they currently exist, contact Waserstein & Nunez today! We provide real world solutions to real world problems.
Waserstein & Nunez, PLLC
Latest posts by Waserstein & Nunez, PLLC (see all)
- Defend Your Brand Through Trademark Litigation - October 15, 2023
