Scranton Defective Grantor Trusts Lawyer
Defective grantor trusts are also called intentionally defective grantor trusts because they take advantage of a tax planning opportunity that is subject to two separate tax laws. They freeze certain assets for the purpose of estate taxes, but not for the income tax purposes. Defective grantor trusts are considered to be totally transferred to the trust for transfer tax purposes, but they are incomplete, or defective, trusts as far as income tax purposes go.
Defective grantor trusts are complex and must be structured properly to benefit from the applicable tax advantages. If you are considering a defective grantor trust, you need to speak with a skilled Scranton defective grantor trust lawyer first. At Haggerty Hinton & Cosgrove, LLP, we have experience with various types of estate planning tools, including such trusts.
Structure of Defective Grantor Trusts
Because a defective grantor trust is irrevocable for gift and estate purposes, nor has the grantor retained any power that would signal estate tax inclusion, future value of the applicable assets being transferred are removed from the grantor’s gross estate when the trust is funded.
The grantor will retain some other powers, and it is treated as a grantor trust for income tax purposes while still being irrevocable. Because of this, the grantor is taxed on all the income, despite not being a beneficiary or entitled to any distributions from the trust.
Provided the trust is structured right, the defective grantor trust will receive and accrue the gross income from its assets that are producing income. This accrual is advantageous for the trust’s beneficiaries. The grantor of the trust also has the option to remove future appreciation from the estate while still maintaining control over its assets.
Power to Reacquire Trust Assets
Under IRC §675(4), a trust is a grantor trust for income tax purposes provided someone holds power “in a nonfiduciary capacity…to reacquire the trust corpus by substituting other property of an equivalent value.” This retained power to switch out assets of comparable value does not preclude the grantor from having made a gift for the purposes of transfer tax, nor will it trigger any estate tax inclusion under §2038. This allows the grantor an opportunity to save any potential losses from the depreciated assets that would normally disappear at the time of death.
An important benefit of a grantor trust is that the grantor can pay income tax on the income of the trust. This creates a nontaxable gift to the trust’s beneficiaries which is what reduces the grantor’s gross estate to have zero estate or gift tax expense.
Retaining a Pennsylvania Estate Planning Lawyer
There are a number of other nuances and complex aspects of defective grantor trusts. This is why it’s so important to have one drafted by an estate planning attorney who has ample experience dealing with defective grantor trusts. If you have questions on these, or any other estate planning options, contact our team at Haggerty Hinton & Cosgrove, LLP at 570-344-9845 to schedule a consultation. Let one of our knowledgeable estate planning lawyers help you with all your financial planning needs.