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Heard at Heckerling 2020 - Day 3

January 16, 2020
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The third day at Heckerling brought almost a full day dedicated to tax planning with grantor and non-grantor trusts. Austin Bramwell, S. Stacy Eastland, Carlyn McCaffrey, and Edwin Morrow led the sessions.

Beyond the basics of grantor trusts being disregarded entities and non-grantor trusts being separate taxpayers, each type presents many differing opportunities to combine trust tax rules with other portions of the Internal Revenue Code to really make the most of tax planning.

Non-Grantor Trust Planning and Ideas Include:

  • Acquiring a residence in a trust could allow the beneficiary to live there rent free without any tax consequences.
  • Acquiring a partial interest in a residence could allow multiple $10,000 real estate tax deductions.
  • Distributions of income can be used to manage trust and beneficiary tax brackets, as well as the 199A deductions.
  • Stock eligible for the Qualified Small Business Stock exclusion could be gifted to a trust to create multiple $10 million gain limitations.
  • By putting trust investment property into an S-Corp and making an ESBT election, tax would be paid by the trust. Distributions to the beneficiary would not be taxed. This is useful when the trust is in a low state tax state and the beneficiary is in a high one.
  • An interest in a flow though business can be placed in a trust for the children of the business owner and continue to be active under passive activity rules, if the trustee is a trusted employee of the underlying activity. Court cases have held that the employee’s hours worked as an employee count towards trustee material participation testing.
  • Charitable deductions for a trust are limited to the gross income of a trust and only allowed if the trust document provides for them. If a trust is holding low-basis, highly-appreciated assets, the grantor of the trust can buy the asset from the trust for an unsecured note. This creates a partial grantor trust to the extent of the note so the sale is not a taxable event. Now the grantor can make the charitable contribution personally and get a deduction for the fair-market value of the property.

Grantor Trust Planning

  • If a Beneficiary Owned Trust (which was discussed yesterday) is a New York trust, any beneficiary owned income distributed to a non-New York beneficiary would not be taxed to the trust in New York since the income is grantor income, not trust income.
  • Selling an appreciated asset to a spousal grantor trust can effectively freeze the future appreciation out of the grantor’s estate. By doing so with an interest free term loan, whose present value equals the fair market value of the asset, this can be accomplished without triggering below market interest issues.
  • Borrowing from a grantor trust can be used to reduce estate taxes since interest paid to the trust is not taxable but the grantor’s assets subject to estate tax are reduced each time interest is paid to the trust.

There were also lively discussions regarding uses of trusts to help effectuate residence and domicile changes as well as responsibilities of trustees under the Uniform Trust Code. We would be happy to discuss any of these issues with you.