Structuring Non-Grantor Trusts for Wealth Transfers and Income Tax Planning

Description

Current tax provisions and potential tax law changes accelerate the need for estate planners to revisit existing wealth transfer structures. Individuals using grantor trusts to minimize estate tax exposure may be better served transferring assets to non-grantor trusts to instead reduce income tax liability.

Although the estate tax exemption may eliminate estate tax concerns for higher net worth taxpayers, lost deductions will hit many taxpayers much harder, increasing the federal and state income tax burden on many income-generating assets. Additionally, some individuals may find that paying the income tax attributable to a trust is too burdensome. Under these circumstances, grantor trusts aren't very effective to minimize or defer wealth transfer taxes.

A non-grantor trust is a separate legal entity taxed as a separate taxpayer, allowing for a deduction for distributions paid to beneficiaries while paying its tax on undistributed income. While it is a practical option for income tax planning, it carries risks, such as higher income tax brackets, lack of access to trust assets by the grantor, and the lack of eligibility for a step-up in basis for gifts to non-grantor trusts.

Under some circumstances, estate planners should consider restructuring existing grantor trust vehicles to convert trusts holding assets, such as real estate, to non-grantor trusts. Additionally, certain spousal trusts may benefit from conversion to non-grantor trust status by including an "adverse party" with the right of approval over marital distributions.

Listen as our experienced panel provides a practical guide to structuring non-grantor trusts, key provisions, migrating assets from grantor trusts to non-grantor trusts to minimize income tax on trust assets, and other crucial considerations for effective estate and tax planning with non-grantor trusts.