The $2.1 trillion tax plan approved by the House Ways and Means Committee in mid-September contains significant estate planning changes that would affect grantor trust rules.
A grantor trust is one where the trust creator (the grantor) and the trust are treated as one for income tax purposes. Many trust structures fall into this broad category of trusts, which are typically used to transfer wealth during life to avoid estate taxes.
The proposal provides that assets transferred into a grantor trust created after the date of the act would be included in the grantor's estate for estate tax purposes. If the grantor ceases to be the owner of the trust during life, the trust assets would be treated as though they were transferred by gift from the grantor for gift tax purposes (distributions would also be treated as gifts for federal gift tax purposes).
We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about the proposed changes to the grantor trust rules.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: Grantor trust structures are one of the most common planning tools that the most wealthy Americans use to avoid paying their fair share of federal income taxes. They're able to get away with it because they have assets that far exceed what they'll actually need for living expenses — a luxury that the average American doesn't have.
We need a system where these trust assets are taxed at some point. Treating grantor trust assets as though they were owned by the grantor for estate tax purposes and gift tax purposes makes absolute sense. After all, those assets are already treated as owned by the grantor for income tax purposes in many cases.
