However, in the grantor trust version, the grantor pays the taxes on the income.
The IRS blesses the indirect gift--the payment of income taxes--from the grantor to the trust.
Whatever the bonus, I hope it works for the grantor as well as for the grantees.
The grantor therefore gains a degree of tax relief, while the assets are transferred to the trust.
Let us say that you are the grantor, meaning you have the bucks and you create the trust.
An augmented personal balance sheet depicts pledges as a liability with the same force on the grantor as any other debt.
Here the grantor must survive the term of the GRAT for the asset to be excluded from his estate.
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Returns are prepared as if the grantor did everything that the trust did.
Transactions between the grantor and the trust are ignored for income tax purposes.
Opening a new bank account for her husband elsewhere would require executing a new document, a near impossible task when the grantor is incompetent.
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That is, from an income tax perspective, income, deductions and credits at the trust level are captured on the personal income tax return of the grantor.
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The estate planner intentionally creates a trust that allows for the severing of the estate tax link without severing the income tax link with the grantor.
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Most GRATs are set up to run for 2-3 years, Doyle said, during which the grantor can receive stock back as annuity payments, instead of cash.
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Most private-stock GRATs are set up so that if they grow only 7.5% a year, the grantor gets back all or almost all of it in annuity payments.
Put an income producing asset into a trust like that and you have the pre-tax income going to the next generation with the grantor paying the income tax.
Gale argued that in a typical license arrangement, there is an understanding that the property will be returned to the grantor of the license subject to normal wear and tear.
Worse, if the trust were required to reimburse the grantor for taxes paid, that could arguably cause the assets of the trust to be included in the grantor's estate, essentially killing the whole strategy.
Here's the key: When the grantor sets up the trust, the IRSfixes the value of his gift based on the assumption that the trust will earn a modest return--about 7.5%, but the IRS-set rate fluctuates with interest rates.
In exchange for the stock the grantor takes back a promissory note, again bearing a government-specified rate of interest (currently less than 1% for a nine-year note) that locks the value of the stock in at the time of the transfer.
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Estate planners have been using grantor trusts for the past two decades, but they always had to warn clients that the IRS might consider the income tax payments by the grantor to be further taxable gifts to the beneficiaries of the trust.
And it says that if the trustee has the ability, but not the obligation, to repay the grantor for the income taxes that the grantor pays on behalf of the trust, then the trust assets will generally not be included in the grantor's estate.
The ruling makes clear that the person who sets up the trust--the grantor--can pay the annual income taxes owed by the trust without the payment being treated as an additional taxable gift to the beneficiaries of the trust (say, the grantor's children or grandchildren).
The way the math works, after 20 years of the grantor paying the income taxes for the trust, there could be twice as much in the trust as there would be if the trust paid its own taxes, says Bernard Kent, a tax partner with PricewaterhouseCoopers in Detroit.
Back in the heyday of using trusts for shifting income, if a trust contained one of those powers, like the power of the grantor to withdraw property from the trust and replace if with property of equal value, someone who thought the trust was being used to shift income, would consider that power to be a defect.
The ruling also applies to special kinds of grantor trusts, such as a generation-skipping trust, which is designed to avoid taxes at the grantor's children's deaths, as well as a grantor-retained annuity trust, where the grantor can transfer any amount of property betting that it will grow faster than the payments he is required to receive back from the trust over a period of years.
An enormous lesson for both the individual grantor and the charity is that both need rainy day funds to cushion sharp, unexpected contractions similar to what we are passing through now.
Very popular over the last ten years and different from the defective grantor trust discussed above, grantor retained annuity trusts (GRATs) have been used to transfer appreciating assets to future generations free of gift tax.
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Currency ETFs - Most currency ETFs are in the form of grantor trusts.
But they insist they were allowed by the rules that grantor A.N.
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