The IRS flipped a stance the agency took seven years earlier on the question of whether certain trust distributions amount to a taxable gift.
“The modification to add the tax reimbursement clause will constitute a taxable gift by the trust beneficiaries because the addition of a discretionary power to distribute income and principal to the grantor is a relinquishment of a portion of the beneficiaries’ interest in the trust,” IRS Associate Chief Counsel for Passthroughs and Special Industries Holly Porter wrote in the guidance document last month.
The trust enables the grantor to transfer assets to the beneficiaries, and this type of entity gets the “
“This strategy is fraught with risks beyond just the gift tax issues,” Valerie Escobar, a senior wealth advisor with the Overland Park, Kansas-based office of
Two footnotes included in the new guidance read as especially significant to certified public accountant Ed Zollars, the author of Kaplan Financial Education’s “
In the second, the agency reminded advisors and tax professionals that, even if “the determination of the values of the gifts requires complex calculations,” the trust beneficiaries “cannot escape gift tax on the basis that the value of the gift is difficult to calculate.”
These kinds of trusts come in handy when advisors, tax pros and their clients are seeking “helpful tools for reducing a taxable estate’s liability in the future,” according to Escobar. For example, business owners can put shares of their companies into the trust in order to “keep the potentially exponential growth out of the grantor’s estate,” she noted. Complexity may ensue, though, in trying to ensure that the grantors keep enough assets for their own budgets and long-term financial plans.
“This is where the ‘defective’ feature shines: It allows the grantor flexibility to continue reducing their estate by way of making tax payments for the trust or place that liability on the trust itself,” Escobar said. “As human nature creeps in, maybe the grantor decides they’ve grown tired of paying taxes for their heirs or need to keep the cash for their own expenses. Flexibility is written into the trust to allow for either eventuality.”
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