Article on Drafting Grantor Trusts To Include An Exit Strategy
Over the last couple of years, many proposals for higher taxes on wealthy Americans have been introduced, the most public of which being the “Buffett Rule,” a minimum 30% income tax rate for millionaires. The most alarming proposal for estate planners is the 2013 Greenbook Proposal (the “Greenbook Proposal”), which proposes that the income tax and transfer tax law applicable to grantor trusts be coordinated so that (1) the grantor of the grantor trust would have to include the trust assets in his or her estate on his or her death, (2) the distributions from the grantor trust would be subject to gift tax during the grantor’s lifetime, and (3) the trust assets would be subject to gift tax on a conversion from a grantor trust to a nongrantor trust during the grantor’s lifetime. See General Explanations of the Administration’s Fiscla YEar 2013 Revenue Proposals 77, www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf. Although the Greenbook Proposal seems far from becoming law, it does highlight that grantor trusts are on the government’s radar for future legislative changes.
These proposals for increasing taxes on wealthy Americans have sounded the alarm for estate planners to ensure that their clients have the flexibility to terminate grantor trust statuts for their irrevocable trusts to allow clients to decrease their tax burden. Alternatively, providing a discretionary tax reimbursement clause in the irrevocable trust agreement or decanting the trust are other options best discussed in a separate article. This article will discuss how to combat potential burdensome taxes by highlighting the most commonly used powers to cause grantor trust status, emphasizing the release of these grantor trust powers, and suggesting sample provisions for the granting and releasing of these powers.