Such unfunded trusts are commonly set up as a "defective" irrevocable trust meaning that it will be treated as a grantor
trust for tax purposes and any income will be reported and taxed to the grantor
Clearly, the grantor
cannot have the power to amend the trust agreement without adverse estate tax consequences.
An Alternative Approach--Converting the Grantor
Trust to a Nongrantor Trust
A final drawback, which is the subject of the new rule, is that if the grantor
does not survive the GRAT term, the full value of the GRAT apparently will be included in the grantor
Obviously, the trust would have to provide for a successor trustee should its provisions survive the grantor
, and the grantor
was originally named trustee.
The trust owns the life insurance policy and is the beneficiary of a policy insuring the grantor
There is no sound tax policy why a transfer to an "equivalent of a trust" should be recognized to transfer ownership under section 404A, but not under the grantor
671-4(b)(2)(i)(A) is available as long as the grantor
trust is treated as owned by only one person.
Whether the grantor
's lifetime transfer of an installment note issued by a grantor
trust to a person who is not the grantor
of the trust is treated as an income tax disposition that requires the reporting of gain.
Consequently, by passing property to the family through a revocable trust rather than under the grantor
's will, the grantor
can avoid publicly disclosing who received what and how much.
The trust also allows the grantor
the opportunity to remove future appreciation from the grantor
's estate while maintaining control over the assets.
As a result, subsequent creditors, purchasers, or lenders of the grantor
may assert their claims against the property.