Christopher K. Caswell Estate Planning Law Blog on Lawyers.com

An Intentionally "Delightful" Grantor Trust

Friday, January 7, 2011 by Christopher K. Caswell

Photo of Christopher K. Caswell

Why should you consider using a "defective" trust? Because it
may be the most "effective" method of handling assets in your taxable estate

Should you use a trust that has been called "intentionally
defective"? The answer may surprise you, and in fact these type of trusts, once
understood, are actually "intentionally delightful". In fact, an article in the
Wall Street Journal described them as "one sexy vehicle".

Why? While it can be
viewed as an aggressive strategy, it is one that the IRS seems to have accepted.
It is a trust vehicle that can be used to move assets out of a taxable estate,
and by doing so also transfer gains to heirs estate tax and capital gain tax
free.

But why is it defective? The short answer is that for income tax
purposes the grantor intentionally creates a defect so that the trust is not
regarded as a separate from the grantor. Therefore the grantor continues to pay
taxes on all income (and thus is able to remove additional funds from a taxable
estate), and also any transactions between the grantor and the trust are deemed
to have no income or capital gains tax effect.

So the fundamental benefit from
these trusts is estate tax savings and capital gain tax savings. But this is
made even more effective because as of this writing the IRS is allowing
historically low interest rates in a related party transactions, which make the
conveyances between the grantor and these trusts that much more inexpensive.


Give us a call if you want us to show you how "delightful" these trusts can be
for you.

 
Posted at 20:20 PM
Topic: Estate Planning
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