Recent Developments

Summary:

New IRS Ruling – if you have a grantor trust (e.g., GRAT, IDIT,
etc.) you MUST visit your tax consultant and be sure you’re in compliance. This
is another head spinner but an important one. We’ll simplify (a lot) to get you
through it.

Grantor trusts are trusts
for which the income is taxed to you, the person setting up the trust
(grantor). This is really important in the context of a number of key estate
planning transactions. For example, if you sell a large part of your real
estate development business to a dynasty trust, if that trust is not
characterized as a grantor trust, that sale could trigger gain for income tax
purposes. A common mechanism to achieve grantor trust status is to provide that
the grantor can substitute trust property in a non-fiduciary capacity for other
property of equivalent value. This mechanism creates a host of concerns, a
critical one of which is whether the IRS would argue that this right would pull
all trust assets back into your estate. The new ruling, Rev. Rul. 2008-22
indicates that this power alone (that doesn’t mean you can’t trip up elsewhere)
won’t cause estate inclusion (under IRC 2036 or 2038) if a list of requirements
are met. The grantor expressly cannot be trustee (but what about being an
investment adviser?). The grantor has to certify in writing that the
substituted property is of equivalent value. Under state law the fiduciary has
the obligation to ensure that the properties are of equivalent value. The
trustee has a duty to invest and manage trust assets impartially as to the
various beneficiaries (no shifting of benefits). What happens if the assets
include family business interests from which perquisites and salaries are paid
is not clear. The trustee has an unrestricted discretionary power to acquire,
invest, reinvest, exchange, sell, etc. trust property in accordance with
standards provided by local law. How this may be applied with a trust investment
adviser serving, or if the grantor is the investment adviser, or if the trust
has restrictions on selling a family business, is not clear.