This article was originally published Sept. 20, 2024, and has been updated to reflect that Republicans will control a unified government beginning in 2025.
Irrevocable grantor trusts are an effective estate planning tool partly because they offer a unique combination of tax benefits. This article examines recent political scrutiny of grantor trusts and looks ahead to their future under a unified Republican government and beyond.
Irrevocable grantor trusts offer a unique combination of tax benefits that make them a valuable tool for estate planning. This is because they are treated differently for gift and estate tax purposes than they are for income tax purposes. This special treatment can result in significant tax savings. Common types of irrevocable grantor trusts include Intentionally Defective Grantor Trusts (IDGT), Spousal Lifetime Access Trusts (SLATs), Irrevocable Life Insurance Trusts (ILITs) and Grantor Retained Annuity Trusts (GRATs).
Common types of irrevocable grantor trusts include:
Irrevocable life insurance trusts (ILITs)
Grantor trusts are not separate entities from their deemed owner for income tax purposes. The grantor and the trust are treated as one taxpayer and the grantor is liable for the trust’s income tax. Grantor trust status can apply to the entire trust or only a portion of it, and the grantor trust status can be changed under certain circumstances.
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Due to the tax advantages offered by grantor trusts, some lawmakers have become increasingly concerned with their potential misuse as perceived tax avoidance tools. Repeated legislative attempts to curtail these benefits demonstrate some lawmakers’ persistence in addressing this issue, raising the question of whether these estate planning strategies may eventually become less effective or eliminated.
Both the Obama and Biden administrations proposed eliminating those perceived loopholes. The proposed measures introduced in Congress sought to limit those benefits by increasing income and/or transfer tax liabilities of high net worth individuals who utilize these techniques. As illustrated below, these additional legislative efforts have included:
With Donald Trump elected to a second term as president, as well as a Republican-controlled Congress beginning in January 2025, it is likely there will be no immediate change to the use of grantor trusts. However, there is a chance that future laws could still affect your current planning. Consult with your tax advisor to determine how these potential changes impact your estate plan.
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