Warning Signs that Your Grantor Trust Could Be at Risk

Estate planning continues to be under attack on a national level. Every year, as an experienced Florida estate planning law firm, we watch as both the state and federal government look to hard-working Americans and the generational wealth that they accumulate over their lifetimes as a way to pay for the national debt. We know just how devastating the tax hit can be for an American family that either did not know how to plan their estate, received poor guidance from their existing attorney, or simply did not have an attorney who focused on how the laws changed.

With the potential sun setting of the Tax Cut and Jobs Act of 2017, we continue to closely monitor both the federal changes to the estate tax limits and also how the federal government is proposing to change the existing estate planning tools available. Dropping from $11.7 million in protection to approximately $5 million is a significant reduction that needs to be carefully monitored by your estate planning attorney. While Florida does not have a state death tax or inheritance tax, this does not mean Floridians will not be impacted should the TCJA sunset at the end of this year and the federal estate tax limit drop down to approximately $5 million per individual.

One of the most concerning developments of the proposed Congressional legislation is the removal or limitation of the use of grantor trust agreements. A grantor trust agreement is an estate planning tool that allows a grantor to create a legacy for his or her loved ones by transferring significant wealth to them in a tax-free manner. The distributions from the grantor trust are typically not included in the grantor’s estate upon his or her death, yet trust income can be taxed at the grantor’s individual income tax rates during his or her life (typically at much lower rates than those that non-grantor trusts would pay). The proposed plan seeks to eliminate this protection, and the assets held in the grantor trust would be included in the grantor’s estate at death. Further, the future distributions could be subject to a gift tax.

Specifically, Congress is paying attention to the following grantor trusts. Let us share four of them that you need to be aware of here on our blog.

GRATs. A GRAT is a Grantor Retained Annuity Trust. This is a popular estate planning tool through which the grantor can transfer assets into the trust without incurring any gift or estate tax penalties. The grantor does receive the benefit of an annuity for a period of years with the remainder of the money accumulating within the trust. The appreciated assets will pass to the grantor’s beneficiaries at the time of his or her passing without incurring any significant gift tax.

SLATs. A SLAT is a Spousal Lifetime Access Trust. This is an estate planning tool with the goal to support the grantor’s spouse while moving assets out of the grantor’s estate. It also allows for the appreciation of assets for future beneficiaries. While the distributions are included in the spouse’s estate, the remaining assets held in trust are not.

IDGTs. An IDGT is an Intentionally Defective Grantor Trust. This is a similar estate-planning tool to the SLAT. The IDGT, however, is set up to not include the assets in either the grantor or the grantor’s spouse’s estate. It is created for the benefit of someone who is not either of these two individuals. One of the main benefits is that the grantor can continue to pay the income tax liability of the IDGT and also sell any of the assets within it.

ILITs. An ILIT is an Irrevocable Life Insurance Trust. For years, this has been a very popular estate planning tool, although not always thought of as a traditional grantor trust. It allows life insurance to pass to the beneficiary at the death of the grantor without gift tax consequences. Further, the premiums can be paid without gift tax penalties using the annual exclusion amount.

We encourage you to look at your Florida estate plan now. If changes need to be made before the current law sunsets, they may need to be made before the end of the year. We are closely monitoring the Congressional changes that could impact Florida estate planning clients in 2022. We encourage you, if you have questions, to schedule a meeting in our office to discuss your concerns and determine how we can help support you in reaching your goals for your legacy, yourself, and your loved ones.