A defective
grantor trust allows an individual who has transferred assets to a
grantor trust to retrieve these assets, which may have appreciated in value over the years, by substituting cash or other property without causing a taxable event to the grantor or grantee.
2007-45, which is the only citation involving a
grantor trust.
The courts have held that the business income is taxable to the taxpayer under a variety of legal concepts, including lack of economic substance (sham theory), assignment of income or that the arrangement is a
grantor trust.
The trust must, at the same time, fall under the
grantor trust income tax rules (IRC Secs.
A trust may distribute income to the individual/settlor's spouse, or hold or accumulate it for future distribution to the settlor's spouse, all subject to the required consent of an adverse party, and not be characterized as a
grantor trust [Internal Revenue Code section 672(a)], An adverse party is a person having a substantial beneficial interest in the trust who would be adversely affected by the exercise or nonexercise of the power; this might include trust beneficiaries, such as an adult child.
Generally, the regulations prohibit QPRTs from selling or transferring the residence, directly or indirectly, to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse during the retained term interest of the trust, or at any time after the retained term interest if the trust continues as a
grantor trust (Regs.
The 2013 PLR's ultimately held that the grantor would not be deemed to be the owner of any portion of the trust under the
grantor trust rules, that the transfer of property by the grantor would not be a completed gift, and that distributions by the distribution committee to the grantor and the other beneficiaries would not be considered completed gifts by the members of the committee.
Finally, an Intentionally Defective
Grantor Trust ("IDGT") exploits the differences in estate and income tax through a grantor's sale of property to the trust in exchange for payments on a note.
Under current law, a
grantor trust is a revocable or irrevocable trust where the grantor is treated as the owner of the trust, but is not considered separately from the trust for income tax purposes.
3) See page 436 for a more complete explanation of the
grantor trust rules, and other applications of the defective trust.
Allowable shareholders under IRC [section] 1361 are individuals, estates, certain exempt organizations and certain trusts:
grantor trusts, pre-mortem
grantor trusts for two years after the grantor's death, postmortem trusts that receive stock under a will (but only for two years following the transfer), voting trusts and "electing small business trusts.
If the Stand Alone SNT is a revocable trust--or if it is irrevocable, but contains special tax provisions--the SNT will be treated as a
grantor trust.
