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Everything You Always Wanted To Know About Grantor (And Other Irrevocable) Trusts But Were Afraid To Ask
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Everything You Always Wanted To Know About Grantor (And Other Irrevocable) Trusts But Were Afraid To Ask

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What is an irrevocable trust? How can it be flexible? How can the parents maintain a level of control? What makes an irrevocable trust a "grantor" trust and, therefore, disregarded for income tax ...

What is an irrevocable trust? How can it be flexible? How can the parents maintain a level of control? What makes an irrevocable trust a "grantor" trust and, therefore, disregarded for income tax purposes? What are the advantages of a grantor trust for asset protection planning and estate tax planning purposes? What are the disadvantages? How can you eliminate the disadvantages through the use of a "toggle" (or flip) switch? What are the tax return and EIN requirements for a grantor trust? What happens when the owner dies? When there is an outstanding installment note, does the owner's death trigger gain? Can a trust be treated as owned by someone other than the grantor? Do grantor trusts still make sense now that the estate tax rates are 40% and the income tax rates, in states like California, are even higher? Are grantor trusts here to stay?

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    Everything You Always Wanted To Know About Grantor (And Other Irrevocable) Trusts But Were Afraid To Ask Everything You Always Wanted To Know About Grantor (And Other Irrevocable) Trusts But Were Afraid To Ask Document Transcript

    • LAW OFFICES BRUCE GIVNER (bruce@GivnerKaye.com) OWEN D. KAYE ( o we n @ G i v n e r K a y e . c o m ) KATHLEEN GIVNER (kathy@GivnerKaye.com) NEDA BARKHORDAR (neda@GivnerKaye.com) GIVNER & KAYE A PROFESSIONAL CORPORATION SUITE 445 12100 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA 90025 www.GivnerKaye.com www.MajorTaxProblems.com PHON E (3 10) 207 -8 008 (8 18) 785 -7 579 F AX (3 10) 207 -8 708 (8 18) 785 -3 027 October 17, 2013 EVERYTHING YOU WANTED TO KNOW ABOUT GRANTOR AND OTHER IRREVOCABLE TRUSTS BUT WERE AFRAID TO ASK 1. What is an “Irrevocable” trust? 2. How many types of irrevocable trusts are there? See the end of this handout. 3. Can you amend an irrevocable trust? 3.1. 3.2. California Probate Code.1 3.3. 4. Rev. Rul. 95-58. §672(c) limit. Protector. Can you control an irrevocable trust? 4.1. 4.2. New trust buys assets from old trust. 4.3. You manage the single member LLC which has all the trust’s assets. 4.4. 1 You pick the trustee. You stop paying premiums to an ILIT. §15403. Modification or Termination of Irrevocable Trust by All Beneficiaries. (a) Except as provided in (b), if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court. (b) If the trust’s continuance is necessary to carry out a material trust purpose, it cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing the material purpose. The court does not have discretion to permit termination of a trust that is subject to a valid restraint on transfer of the beneficiary's interest as provided in Chapter 2 (beginning with §15300). 15404. Modification or termination by settlor and all beneficiaries. (a) If the settlor and all beneficiaries of a trust consent, they may compel the modification or termination of the trust. (b) If any beneficiary does not consent to the modification or termination of the trust, upon petition to the court, the other beneficiaries, with the consent of the settlor, may compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired. (c) If the trust provides for the disposition of principal to a class of persons described only as "heirs" or "next of kin" of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances.
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 2 of 11 4.5. The trust includes a Protector. 4.6. Tax reimbursement clause. Rev. Rul. 2004-64.2 4.7. Danger: In re Schwarzkopf, 626 F. 3d 1032 (9th Cir. 2010). 5. “Own” For Income Tax ≠ “Own” For Estate Tax. 6. What is a “grantor”3 trust? 6.1. 6.2. Goal: Owned for income tax, not owned for estate tax. 6.3. 2 A revocable “family” trust is a “grantor trust. Rev. Rul. 85-13.4 “In Situation 3, the governing instrument provides the trustee with the discretion to reimburse A from Trust's assets for the amount of income tax A pays that is attributable to Trust's income. As is the case in Situation 1 and Situation 2, A's payment of the $2.5x income tax liability does not constitute a gift by A because A is liable for the income tax. Further, the $2.5x paid to A from Trust as reimbursement for A's income tax payment was distributed pursuant to the exercise of the trustee's discretionary authority granted under the terms of the trust instrument. Accordingly, this payment is not a gift by the trust beneficiaries to A. Also, assuming there is no understanding, express or implied, between A and the trustee regarding the trustee's exercise of discretion, the trustee's discretion to satisfy A's obligation would not alone cause the inclusion of the trust in A's gross estate for federal estate tax purposes. This is the case regardless of whether or not the trustee actually reimburses A from Trust assets for the amount of income tax A pays that is attributable to Trust's income. The result would be the same if the trustee's discretion to reimburse A for this income tax is granted under applicable state law rather than under the governing instrument. However, such discretion combined with other facts (including but not limited to: an understanding or pre-existing arrangement between A and the trustee regarding the trustee's exercise of this discretion; a power retained by A to remove the trustee and name A as successor trustee; or applicable local law subjecting the trust assets to the claims of A's creditors) may cause inclusion of Trust's assets in A's gross estate for federal estate tax purposes.” 3 “Grantor” has the meaning given to it under Reg. §1.671-2(e): “For purposes of part I of subchapter J, chapter 1 of the Internal Revenue Code, a grantor includes any person to the extent such person either creates a trust, or directly or indirectly makes a gratuitous transfer (within the meaning of ¶(e)(2)…) of property to a trust. For purposes of this section, the term property includes cash. If a person creates or funds a trust on behalf of another person, both persons are treated as grantors of the trust. (See §6048 for reporting requirements that apply to grantors of foreign trusts.) However, a person who creates a trust but makes no gratuitous transfers to the trust is not treated as an owner of any portion of the trust under §§671 through 677 or 679. Also, a person who funds a trust with an amount that is directly reimbursed to such person within a reasonable period of time and who makes no other transfers to the trust that constitute gratuitous transfers is not treated as an owner of any portion of the trust under §§671 through 677 or 679. See also §1.672(f)-5(a).” 4 Madorin, 84 T.C. 667 (1985) (a grantor should be treated as the owner of the partnership interests the grantor transferred to his grantor trust. Cf. Rothstein v. U.S., 735 F. 2d 704 (2nd Cir. 1984) (contrary position – trust owned by a grantor must be regarded as a separate taxpayer capable of engaging in sales transaction with the grantor). In Rev. Rul. 85-13, the IRS announced it would not follow Rothstein. Headnote of Rev. Rul. 84-13. “A grantor who acquires the corpus of a trust in exchange for the grantor's unsecured promissory note will be
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 3 of 11 6.4. IRC §675(4)(C).5 Usefulness of near-death swaps: (i) step up in basis; (ii) preserve loss (put the loss asset into trust; (iii) elude 3 year rule of §2035 (swap the policy into trust for other assets); and (iv) get assets back from a GRAT about to expire. 6.5. IRC §677(a)(3).6 6.6. Power to add a charitable beneficiary held by a nonadverse party. 6. Why is it called a “defective” trust? 7. What are the advantages of a “grantor” trust? 7.1. In A Sale. Mom and Dad own apartment building worth $5,000,000 with a basis of $1,000,000. Mom and Dad establish irrevocable grantor trust for the benefit of children. Mom and Dad believe the building will appreciate significantly between the date of transfer and the date of the survivor’s death. Mom and Dad make a gift of $500,000 to the children’s trust. Mom and Dad sell the building to the children’s trust for $5,000,000, receiving back $500,000 as a downpayment and a $4,500,000 30 year interest only installment note a 3.5% interest. (The 30 year term does not exceed the survivor life expectancy of Mom and Dad.) considered to have indirectly borrowed the trust corpus. As a result, the grantor will be treated as the owner of the trust and the grantor's acquisition of the trust corpus will not be viewed as a sale for federal income tax purposes. The Service will not follow the Rothstein decision.” 5 The grantor shall be treated as the owner of any portion of a trust in respect of which—(4) General powers of administration. A power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term “power of administration” means any one or more of the following powers: … (C) a power to reacquire the trust corpus by substituting other property of an equivalent value. 6 (a) General rule. The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under §674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be—…(3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse (except policies of insurance irrevocably payable for a purpose specified in §170(c) (relating to definition of charitable contributions)).
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 4 of 11 Advantage: Mom and Dad incur no capital gain tax on the sale, even if the principal of the note is paid off. Mom and Dad incur no tax on the receipt of interest on the note. Disadvantage: building is not included in their estate so it does not get a stepup in basis. Cure for the disadvantage: when one of the parents seems ill, have the parents buy the building from the children’s trust for a note. That way the building will be owned by the parents on the first spouse’s death, gaining a step-up in basis. 7.2. In An ILIT. The ILIT can buy a policy from parents for full fair market value to avoid the 3 year rule of IRC §2035 and yet avoid the §101 transfer for value rule. Is §675(4)(C) a problem?7 7.3. In A QPRT. Mom and Dad can continue to deduct the interest on the mortgage. Mom and Dad can continue to deduct the property taxes. Mom and Dad can take advantage of §121 $250,000 capital gain exclusion. 7.4. 8. S Corporation.8 What Are The Tax Return Requirements.9 Separate one is not needed.10 7 Should not since Jordahl, 65 T.C. 92 (1975), acq. 1977-1 C.B.1, involved a trust with life insurance policies and the Tax Court, in a reviewed opinion, held against inclusion. 8 IRC §1361(c)(2)(A)(i). 9 Taback and Bowman, “Frequently Asked Questions On Grantor Trust Tax Reporting,” 39 Estate Planning #8 (August 2012), page 34. 10 Reg. §1.671-4(a). The Traditional Method. “Portion of trust treated as owned by the grantor or another person. Except as otherwise provided in paragraph (b) of this section and §1.671-5, items of income, deduction, and credit attributable to any portion of a trust that, under the provisions of subpart E (section 671 and following), part I, subchapter J, chapter 1 of the Internal Revenue Code, is treated as owned by the grantor or another person, are not reported by the trust on Form 1041, ``U.S. Income Tax Return for Estates and Trusts,'' but are shown on a separate statement to be attached to that form. …”
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 5 of 11 Reg. §1.671-4(b)(1). Two Alternative Methods. “In general. In the case of a trust all of which is treated as owned by one or more grantors or other persons, and which is not described in ¶(b)(6) or (7)…, the trustee may, but is not required to, report by one of the methods described in this ¶(b) rather than by the method described in ¶(a) of this section. A trustee may not report, however, pursuant to ¶(b)(2)(i)(A) of this section unless the grantor or other person treated as the owner of the trust provides to the trustee a complete Form W-9 or acceptable substitute Form W-9 signed under penalties of perjury. See §3406 and the regulations thereunder for the information to include on, and the manner of executing, the Form W-9, depending upon the type of reportable payments made.” Reg §1.671-4(b)(2). “A trust all of which is treated as owned by one grantor or by one other person. (i) In general. In the case of a trust all of which is treated as owned by one grantor or one other person, the trustee reporting under this paragraph (b) must either— (A) Furnish the name and taxpayer identification number (TIN) of the grantor or other person treated as the owner of the trust, and the address of the trust, to all payors during the taxable year, and comply with the additional requirements described in paragraph (b)(2)(ii) of this section; or (B) Furnish the name, TIN, and address of the trust to all payors during the taxable year, and comply with the additional requirements described in paragraph (b)(2)(iii) of this section. (ii) Additional obligations of the trustee when name and TIN of the grantor or other person treated as the owner of the trust and the address of the trust are furnished to payors. (A) Unless the grantor or other person treated as the owner of the trust is the trustee or a co-trustee of the trust, the trustee must furnish the grantor or other person treated as the owner of the trust with a statement that— (1) Shows all items of income, deduction, and credit of the trust for the taxable year; (2) Identifies the payor of each item of income; (3) Provides the grantor or other person treated as the owner with the information necessary to take the items into account in computing the grantor's or other person's taxable income; and (4) Informs the grantor or other person treated as the owner that the items of income, deduction and credit and other information shown on the statement must be included in computing the taxable income and credits of the grantor or other person on the income tax return of the grantor or other person. (B) The trustee is not required to file any type of return with the Internal Revenue Service. (iii) Additional obligations of the trustee when name, TIN, and address of the trust are furnished to payors. (A) Obligation to file forms 1099. The trustee must file with the IRS the appropriate Forms 1099, reporting the income or gross proceeds paid to the trust during the taxable year, and showing the trust as the payor and the grantor or other person treated as the owner of the trust as the payee. The trustee has the same obligations for filing the appropriate Forms 1099 as would a payor making reportable payments, except that the trustee must report each type of income in the aggregate, and each item of gross proceeds separately. See ¶(b)(5) of this section regarding the amounts required to be included on any Forms 1099 filed by the trustee. (B) Obligation to furnish statement. (1) Unless the grantor or other person treated as the owner of the trust is the trustee or a co-trustee of the trust, the trustee must also furnish to the grantor or other person treated as the owner of the trust a statement that— (i) Shows all items of income, deduction, and credit of the trust for the taxable year; (ii) Provides the grantor or other person treated as the owner of the trust with the information necessary to take the items into account in computing the grantor's or other person's taxable income; and (iii) Informs the grantor or other person treated as the owner of the trust that the items of income, deduction and credit and other information shown on the statement must be included in computing the taxable income and credits of the grantor or other person on the income tax return of the grantor or other person.
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 6 of 11 Needed if gross income of $600 or more, regardless of taxable income.11 Needed if it has an NRA beneficiary.12 EIN needed if traditional or second alternative reporting method used.13 Even when EINs not needed due to lack of gross or taxable income, many practitioners obtain them as a vestige or prior regulations and it proves useful on grantor’s death by providing continuity, e.g., ILITs. Traditional method not available to all grantor trusts.14 May change from traditional to alternative by filing final 1041 and including “Pursuant to Treas. Reg. §1.671-4(g), this is the final Form 1041 for this grantor trust.” Non-U.S. trust files a 1040NR.15 Assets may trigger additional returns: 8621 (PFICs); 926 (transfers of property to foreign corporations); 5471 (interests in certain non-U.S. corporations); and 8865 (certain non-U.S. partnerships). What happens when the owner dies? New EIN if it continues. Traditional Method: (i) due date is same as for decedent’s final return (April 15); and (ii) Form 1041 must indicate it is the final return. First Alternative Method: must provide a new W-9 with new EIN to all payors. Second Alternative Method: Form 1096 for year ending with owner’s death and (2) By furnishing the statement, the trustee satisfies the obligation to furnish statements to recipients with respect to the Forms 1099 filed by the trustee.” 11 IRC §6012(a)(4). 12 IRC §6012(a)(5). 13 If a single owner of a trust dies, the trustee must get a new EIN if the trust will continue to exist even if the trust previously had its own EIN. 14 (i) trusts with non-U.S. assets or situs; (ii) QSSTs; (iii) trusts with single owner with a fiscal year, in which case the trust must be on that fiscal year; (iv) where owner is not a U.S. person; and (v) multiple owners and one is an NRA. 15 Be alert to the need for an FBAR (TD F 90-22.1); Form 8938; Form 3520 (if U.S. beneficiary receives a distribution of more than $100,000); Form 3520 (if a U.S. trust is funded by or receives more than $100,000 from an NRA); Form 3520-A (if the trust is a non-U.S. trust with a U.S. owner).
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 7 of 11 indicate it is the final return. What happens when one spouse dies in a community property grantor trust? 9. What are the disadvantages of a “grantor” trust? 10. Does The Grantor’s Death With An Outstanding Note Trigger Gain?16 11. What Is A Reverse Grantor Trust?17 12. What is a “flip” trust?18 Is toggling a listed transaction?19 13. What is the problem with using “protectors”? 14. Are Grantor Trusts Here To Stay? 15. Do Grantor Trusts Still Make Sense? In the past the federal estate tax rate at 55% could be almost 15 points higher than the federal and state income tax rates (35% and a deductible 9.3%). Now the federal estate tax rate at 40% - combined with a $10,500,000 married couple exclusion which is COLA’d – is about the same as the state and federal capital gains tax rate (20 + 3.8 = 13.3 = 37.1%) and lower than the top ordinary income tax rate (39.6% + 13.3% (whether or not deductible)). Reduction in the estate tax rate may also affect the use of §6166 deferral and Graegin 16 Cantrell, “Gain Is Realized At Death,” Trusts & Estates, February 2010, page 20; Gans & Blattmachr, “No Gain At Death,” Trusts & Estates, February 2010, Page 34: “…first, that gain is not recognized at the time of the grantor’s death; and second, that the income in respect of a decedent (IRS) regime, largely contained in Internal Revenue Code Section 691, cannot apply.”” 17 Stevens, “The Reverse Defective Grantor Trust,” 33 Trusts & Estates (October, 2012). 18 February 21, 2013, Steve Leimberg’s Estate Planning Email Newsletter Archive Message #2068 by Alan Gassman & Christopher Denicolo: Defective Grantor Trusts Are Not Black Holes. “We do not believe that toggling off grantor trust status constitutes an income recognition event. We have never heard of this tax on ‘toggling off’ and have found no authority to indicate how or why it would be imposed. Do not sell your clients short by not offering to allow them to engage in defective grantor trust planning.” 19 The only transactions which experts and the IRS have identified as having the potential for tax avoidance or evasion and are considered “transactions of interest” occur when a reversionary interest is sold at fair market value so that there is no gain recognized, and the grantor trust status ends. See IRS Notice 2007-73, Transaction of Interest – Toggling Grantor Trust.
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 8 of 11 notes. May be better to deduct the corresponding interest payments on the annual fiduciary income tax returns for the estate instead of on the 706. Difficult if the beneficiaries responsible for the estate tax ≠ beneficiaries responsible for the fiduciary income tax. But deduction on 706 is permitted no matter when paid. But estates are on cash basis method of accounting. EXHIBIT A. Acronym Meaning Why It’s A Grantor Trust ILIT. _________________ _______________________ GRAT. _________________ _______________________ GRUT. _________________ _______________________ CLAT. _________________ _______________________ Grantor CLAT. (illustration is Exhibit B.) _________________ _______________________ Non-grantor CLAT. _________________ _______________________ T-CLAT. _________________ _______________________ Super CLAT.20 _________________ _______________________ 20 BNA Portfolio 866-2nd Charitable Lead Trusts, VI.D.1, second paragraph: “The charitable lead “super trust” is a grantor charitable lead trust that attempts to retain for the grantor the advantage of both the grantor and nongrantor trusts by preserving the income tax charitable deduction and also removing the trust corpus from the grantor's estate. The foundation for this type of trust arises from the lack of parity between income tax and estate tax principles. Merely because the retention of a certain power by the grantor results in the income being taxed to him or her under the income tax law does not necessarily mean that this same power is sufficient to cause inclusion of the corpus in the grantor's estate under the estate tax rules. The charitable lead super trust involves a retention by the grantor of a power over the corpus sufficient to cause the grantor to be taxed on the income of the trust under the grantor trust rules but not of such a nature as to cause the corpus to be included in the grantor's estate. The concept of the super trust or, as more frequently referred to outside of the charitable lead trust context and in general estate planning discussions, an “intentional” grantor trust (or intentionally defective grantor trust or IDGT), has gained in popularity and use over time. And although there is a growing body of authority regarding the methods that permit a trust to be treated as an intentional grantor trust for
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 9 of 11 CLUT. _________________ _______________________ CRAT. _________________ _______________________ CRUT. _________________ _______________________ SLAT. _________________ _______________________ SLUT. _________________ _______________________ QPRT. _________________ _______________________ IDIT. _________________ _______________________ Dynasty trust. _________________ _______________________ Reciprocal trusts. _________________ _______________________ GST trust. _________________ _______________________ DAPT. _________________ _______________________ NAPT. _________________ _______________________ CGAPT.21 _________________ _______________________ BDIT. _________________ _______________________ income tax purposes but not be subject to adverse rules for estate (or gift) tax purposes, drafters of super charitable lead trusts should nevertheless exercise caution in navigating the labyrinth of the grantor trust rules under §§671-679 while making sure that some other power may not exist within the trust that could cause the assets to be includible for estate tax purposes. The primary retained powers that may achieve this result for use in charitable lead trusts include: (1) permitting the income of the trust to be used to pay the premiums of life insurance policies on the life of the grantor or the grantor's spouse; (2) giving a non-adverse trustee the power to distribute principal among noncharitable beneficiaries; and (3) giving the grantor, in a nonfiduciary capacity, the power to reacquire the corpus by substituting property of equal value. These powers, when retained by the grantor or the grantor's spouse, will cause the income of the trust to be taxed to the grantor under the grantor trust rules.” [footnotes omitted] 21 If the trust is formed in a Alaska or Nevada, the grantor can be a discretionary beneficiary or able to be added by a protector and the trust can still be excluded from the grantor’s estate. See PLR 200944002. Givner & Singer, “The Completed Gift Asset Protection Trust,” Journal of Financial Service Professionals, page 60 (September, 2011).
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 10 of 11 DING.22 _________________ _______________________ NING. _________________ _______________________ Bypass trust.23 _________________ _______________________ Marital24 Trusts. _________________ _______________________ QTIP Trust. _________________ _______________________ QDOT Trust. _________________ _______________________ Survivor’s Trust.25 _________________ _______________________ §678 Trust.26 _________________ _______________________ 22 “Several Private Letter Rulings confirm that under Delaware law a grantor can create a non-grantor asset protection trust for income tax purposes under Subpart E of Subchapter J of the Internal Revenue Code (the “Code”), fund the trust with contributions that are not considered taxable gifts for federal gift tax purposes and still retain the right to receive discretionary distributions of trust income and principal from the trust. In Delaware such trusts are commonly known as “DING” trusts. The acronym stands for “Delaware Incomplete Gift NonGrantor Trust.” [PLRs 200612002; 200502014; 200247013; 200148028.] Delaware does not impose state income tax on income and capital gains accumulated in trust for ultimate distribution to out of state beneficiaries.4 If the grantor and beneficiaries of a DING reside in a state that does not tax trusts based on the residence of the grantor or beneficiaries, it is possible to eliminate state income taxes. This presents a planning opportunity for an individual that owns a low basis asset and contemplates the sale of such asset in the future. For instance, a New York City resident who is the owner of a closely held S-corporation could create a DING and transfer his S-corporation stock to the DING. When the DING sells the assets, the gain will escape New York State and City income tax. Many individuals residing in states such as New York, New Jersey, Kentucky, Massachusetts, Michigan and Missouri have established DINGs not only for the asset protection feature, but also to minimize or avoid state income tax.” Gordon, “Use of Delaware Incomplete Gift Non-Grantor Trusts In Light of IR-2007-127,” 2011. 23 Synonyms include “decedent’s trust,” “B Trust,” “exclusion trust,” and “exemption trust.” Big problem for Bypass Trusts is that they normally are not grantor trusts and, therefore, you do not want the residence transferred to it on the first spouse’s death for fear of losing the §121 $250,000 exclusion. So, if you provide that the survivor has a withdrawal power over all taxable income, which includes taxable capital gains income, from a separate bypass trust set up only to hold the residence, the survivor becomes the owner for income tax purposes under the plan language of §678. 24 Most commonly mis-spelled word in all of estate planning!! 25 Synonym: “A” Trust. 26 Under §678, a person other than the grantor may be treated as the owner of the whole or any portion of the trust if (a) the person has the power, exercisable solely by himself or herself, to vest the corpus or income in himself or herself or (b) if he or she has partially released or modified such a power so that if the power were retained by the grantor, the grantor would be treated as the owner of the trust under the principles of §§671-677 of the Code. A third person will not be treated as the owner of the trust income if the grantor of the trust is otherwise treated as the owner of that income under the other grantor rules of §§673-677 or 679. §678 should
    • LAW OFFICES GIVNER & KAYE A PROFESSIONAL CORPORATION Everything You Wanted To Know About Grantor And Other Irrevocable Trusts But Were Afraid To Ask October 17, 2013 Page 11 of 11 EXHIBIT B The Vanguard Explorer Fund Investment reported taxable income to its investors of 0.12% as ordinary income and 2.92% as capital gains for the period beginning 10/31/2011 and ending 10/31/2012. The fund’s increase in value during the period was 16.28%. A trust investing in this fund for this year would report a 2.92% capital gain and 0.12% as ordinary income despite the 16.28% rate of return. A portion of the excess growth would be recognized as capital gains when the mutual fund is sold in the 15 year to satisfy the payment which must be made to the charity. not apply if the power is subject to a HEMS standard. Are Crummey powers a problem? Perhaps not. See PLR 200606006.