The Use of Grantor Trusts in Estate Planning

Abstract:     
Estate planners have long been aware of the lack of symmetry in the income taxation and transfer taxation of trusts. Specifically, a gift to an irrevocable trust can be treated simultaneously as both (i) a completed transfer for transfer tax purposes and (ii) an incomplete transfer for income tax purposes. Thus, it is possible to structure an irrevocable trust so that the assets of the trust will be excluded from the donor's estate at his or her death, while at the same time the trust will be a grantor trust for income tax purposes during the donor's lifetime. Structuring trusts in this manner may give rise to certain strategic, estate planning advantages. The purposes of this commentary are, first, to consider why a planner might wish to structure a trust in this manner and, second, to review the principal techniques for achieving grantor trust status and (at the same time) avoiding inclusion of the trust assets in the donor's estate.

working papers series