Proposed Bill Provides for Changes to Grantor Trust Taxation

The House Ways and Means Committee recently introduced proposed changes to the estate, trust, and gift taxation laws that could have a tremendous impact on the tax treatment of grantor trusts if signed into law.

What are grantor trusts?

A grantor trust is a trust in which the person who establishes the trust is the owner of the property and assets for estate and income tax purposes.

This type of trust is desirable because:

  • The grantor’s individual income tax rate is applied to the trust rather than the tax rate of the trust itself, offering a more favorable rate;
  • The trust allows the grantor the ability to engage in sales and loans to the trust without incurring federal income tax;
  • The trust is not subject to federal estate tax when the grantor dies; and
  • Assets within the trust appreciate income-tax-free for beneficiaries.

Changes to grantor trust taxation

The House and Ways Committee draft bill calls for a revamp of the estate and gift tax. The proposal aims to amend grantor trusts in the following ways:

  • A grantor trust would be included in the deemed owner’s taxable estate.
  • A gift tax would be triggered on any distribution from the grantor trust to a trust beneficiary, with a few exceptions.
  • Asset sales to the grantor trust by the deemed owner would incur federal income tax unless the recipient beneficiary is the grantor’s spouse or if the distribution discharges an obligation of the grantor.

Help is available

The estate planning attorneys at O’Reilly Rancilio are available to answer your questions. For more information, please call 586-726-1000 or visit our website.

Categories: Estate Tax