Chapter 16 - Special Rules for Grantor Trusts: If enacted into law, section 2901 of the internal revenue code would have a significant impact on estate planning strategies that utilize grantor trusts. Grantor trusts have been utilized extensively in estate planning because of its unique property – namely, the grantor is considered the owner of the trust for income purposes, but the assets of the trust are not subject to estate tax.
Chapter 16 calls for all assets included in grantor trusts at the time of death of the deemed owner, to be includable in the taxable estate of the deceased. As written, this would also include the death benefit from life insurance held in a grantor trust. While it is apparent the drafters intend that more assets be includable in the gross estate, we do not at this time believe their intent was to target life insurance.
The changes would apply to future grantor trusts established after the enactment date, likely sometime in 2021. Although there is a grandfathering provision of grantor trusts established before the enactment date, if an existing trust receives a future contribution (i.e., premium payment) from the grantor, a prorated portion of the assets would be includable in the taxable estate. In addition, if assets are transferred from a grantor trust to children, the transfer will be treated as a gift equal to the value of the transferred property.
Many ILITs for estate planning purposes have been structured as grantor trusts. Proposed modifications to grantor trusts to now include life insurance in the taxable estate of the grantor would upend significant parts of a thoughtfully laid out estate plan to pay estate taxes and protect the family, business, farm. In addition, certain sections in the IRC could cause non-grantor trusts to become grantor trusts inadvertently. Under current law that is not a big deal, but the enactment of Section 2901 would make it a very big deal indeed.
Our industry lobby, Finseca, is working on potential solutions with policymakers.