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Beth Kaufman Quoted in Tax Analysts, New Obama Budget Proposal Targets Popular Estate Planning Technique

February 15, 2012, Tax Analysts

Excerpt taken from article.

A proposal in President Obama's fiscal 2013 budget plan that would include the assets of a grantor trust in the grantor's gross estate would limit a widely used estate planning technique, practitioners told Tax Analysts February 14.

The proposal, included in the budget plan released February 13, would also subject the assets in a trust to the gift tax if the grantor ceased to be the owner of the trust. The proposal would apply to anyone deemed the owner of a trust who sells property to a trust in a transaction that would be subject

to capital gains tax if the person were not deemed the owner. (For Treasury's green book explanation of the fiscal 2013 revenue proposals, see Doc 2012-2947 or 2012 TNT 30-32 . For prior coverage, see Doc 2012-2930 or 2012 TNT 30-1.)

A grantor trust as defined in the code is not a separate taxable entity from the grantor for income tax purposes. Under current law, it is possible for a grantor to make a completed transfer to a trust for gift and estate tax purposes but remain liable for taxes on the income to the trust.

"Transferring property to a grantor trust can allow the property to grow tax free, with the grantor footing the income tax bill," said Jay A. Soled, a professor at Rutgers University. A grantor trust that is not includable in the grantor's estate is commonly called an intentionally defective grantor trust, even though its status as a grantor trust is not defective.

Grantor trusts may also be used to purchase assets from the grantor. Under current law, a sale from the grantor to the grantor trust is ignored for income tax purposes, so no gain is recognized. The transaction may be an installment sale, allowing the trust to repay the grantor over time, similar to a grantor retained annuity trust (GRAT), while future appreciation in the assets is not subject to transfer tax. "Sales to intentionally defective grantor trusts are one of the major ways people minimize their transfer tax liability," Soled said.

"When coupled with the proposal to require a 10-year minimum term for a GRAT, it does significantly limit planning options," said Beth Shapiro Kaufman, a partner at Caplin & Drysdale.

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