Alerting Clients to the Income Tax Implications of a Grantor Trust

Grantor trusts are highly valuable estate planning tools that can be structured to yield a variety of tax results. In one common grantor trust structure, the trust assets of an intentionally defective grantor trust will not be includible in the grantor’s gross estate, yet all items of income – ordinary income and capital gains – will be taxable to the grantor. Grantor’s responsibility for the income tax liability effectively further reduces the grantor’s estate.

It is critical for grantors to understand these income tax implications. It is especially important for cash flow planning purposes because in many such structures, the grantor will not receive cash distributions from the trust. If the grantor does not want to be liable for the income tax then it is possible to structure the trust in other ways. A discussion of the pros and cons of grantor trust status for income tax purpose is warranted in such instances.

For questions about these topics or other matters, please contact Jean McDevitt, tax principal and private client services lead, at 1.800.244.7444.