Article on Agressive Transfer Techniques and Grantor Trusts

Jay A. Soled (Professor of Accounting and Information Systems and Director of the Master of Accounting in Taxation Program, Rutgers University Business School) and Mitchell Gans (Professor of Law, Hofstra University) recenty published their article entitled, Sales to Grantor Trusts: A Case Study of What the IRS and Congress Can Do To Curb Aggressive Transfer Techniques, 78 Tenn. L. Rev. 973 (2011).  The introduction to the article is below:

In the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Congress temporarily raised the applicable exclusion amount-the dollar figure that taxpayers can pass free of transfer tax (i.e., estate, gift, and generation-skipping transfer taxes)-from $ 1 million to $ 5 million. This law is set to expire at the end of 2012, at which time the $ 1 million applicable exclusion amount is scheduled to return. In two years, if Congress wishes to maintain the $ 5 million applicable exclusion amount and avoid costing the federal coffer billions of dollars in lost revenue, it will have to eliminate several of the most utilized tax-saving devices in estate planning. The devices currently under consideration for elimination include the so-called zeroed-out, grantor-retained annuity trusts (GRATs), minority and marketability valuation discounts for certain intrafamily transfers, and qualified personal residence trusts.  These staples of the estate planning world have been part of the panoply of tools that practitioners have devised to minimize taxpayers’ transfer tax burdens.

Notwithstanding congressional attention to the elimination of these mainstay planning tools, there has been no discussion in Washington, D.C. to date about eradicating other commonplace transfer tax-savings devices. One such device is known as a sale to a grantor trust, which can replace many of the devices under consideration for the congressional knife and achieve similar transfer tax savings.  While nothing is certain, estate planners will likely switch gears in the aftermath of the likely transfer tax system overhaul and use sales to grantor trusts, among other techniques, to fill the void left by the absence of comparable transfer tax-savings devices. 

In anticipation of taxpayers’ attempts to minimize their transfer tax obligations, this analysis uses sales to grantor trusts as a case study of what can be done to protect the transfer tax base from erosion. In the sections that follow, we outline how the IRS and Congress should each respond to the emergence of sales to grantor trusts and other transfer tax-savings devices that ultimately become taxpayers’ methods of choice to defeat their transfer tax obligations. In Section II, we overview how sales to grantor trusts operate and how they compare to other transfer tax savings devices. In Section III, we point out how such sales and other transfer tax savings devices are vulnerable to challenges by the IRS. In Section IV, we suggest ways that Congress can stem taxpayers’ use of sales to grantor trusts and other planning devices designed to circumvent transfer tax obligations. In Section V, we offer our conclusions.