Budget proposal includes change to treatment of intentionally defective trusts


Among the various estate tax proposals in President Barack Obama’s recently released fiscal year 2013 revenue proposals is a new plan that could alter estate planning techniques and benefits with intentionally defective grantor trusts (IDGTs); the assets in these trusts would be included in the estate of the grantor at death ( General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals (Green Book)).

The proposal is being considered to coordinate certain income and transfer tax rules applicable to grantor trusts. Under the proposal, when a transfer is made to a grantor trust, the gift tax would be applicable when there is a distribution from the grantor trust or when the trust ceases to be a grantor trust. To the extent not yet distributed, any amount in the grantor trust at the date of the grantor’s death would be subject to estate tax. This would eliminate the transfer tax benefits of sales to IDGTs.

In addition, the proposal would apply to any nongrantor who is deemed to be an owner of the trust and who engages in a sale, exchange or comparable transaction with the trust that would have been subject to capital gains tax if the person had not been a deemed owner of the trust. In such a case, the proposal would subject to transfer tax the portion of the trust attributable to the property received by the trust in that transaction, including all retained income therefrom, appreciation thereon and reinvestments thereof, net of the amount of the consideration received by the person in that transaction. The proposal would reduce the amount subject to transfer tax by the value of any taxable gift made to the trust by the deemed owner. The transfer tax imposed by this proposal would be payable from the trust.

The proposal would not change the treatment of any trust that is already includible in the grantor’s gross estate under existing provisions of the Code, including grantor retained income trusts (GRITs); grantor retained annuity trusts (GRATs); personal residence trusts (PRTs); and qualified personal residence trusts (QPRTs).

The proposal would be effective with regard to trusts created on or after the date of enactment and with regard to any portion of a pre-enactment trust attributable to a contribution made on or after the date of enactment. The IRS would be granted authority to issue regulations, including the ability to create transition relief for certain types of automatic, periodic contributions to existing grantor trusts.

The revenue proposals would also:

  • Return permanently the estate, gift and generation-skipping transfer (GST) tax regimes to the 2009 rules (45% top tax rate and $3.5 million exemption for estate and GST tax and $1 million for gift tax, starting in 2013);
  • Make permanent the portability of unused exemption amounts between spouses (starting in 2013);
  • Require consistency in value for transfer and income tax purposes (effective date of enactment);
  • Modify the rules on valuation discounts (for transfers after the date of enactment);
  • Require a minimum 10-year term for GRATs and a maximum term of the life expectancy of the annuitant plus 10 years—affecting the ability to use GRATs for estate tax planning (applicable to trusts created after the date of enactment);
  • Limit the duration of GST tax exemption to 90 years (for additions to pre-existing trusts and trusts created after the date of enactment); and
  • Extend the lien on estate tax deferrals provided under Sec. 6166 (up to 15 years and three months from the date of death) (for decedents dying after the effective date and pre-existing unexpired liens on the effective date).

Eileen Reichenberg Sherr, CPA, MST (
esherr@aicpa.org ) is a senior technical manager–Tax with the AICPA.

More from the JofA:

 Find us on Facebook  |   Follow us on Twitter  |   View JofA videos


Personal happiness and new hires’ pay on the rise

The news of the past couple of weeks hit home with reports on personal financial satisfaction and pay for finance professionals. See how much you know about recent news reports with this quiz.


Preventing and detecting fraud at not-for-profits

Organizations in all industries must deal with the potential for fraud to occur, and design controls to prevent and detect it. Environment, policies, and controls can help organizations steer clear of problems.


The dangers of dabbling

To meet evolving marketplace needs, CPAs often look to diversify their service offerings. Firms can mitigate the risk of experiencing competency-related professional liability claims by implementing these basic steps.