FOR BREAKING NEWS VISIT WWW.QNS.COM FEBRUARY 13, 2020 • QUEENS BUSINESS • THE QUEENS COURIER 37
Elder Law Minute TM
The eff ectiveness of a defective trust
BY RONALD A. FATOULLAH, ESQ.
AND JOSEPH BRENINGSTALL, ESQ.
In the previous installment in this
series, we introduced the various forms
of trusts and explained the diff erences
between grantor and non-grantor trusts
as well as briefl y describing the advantages
found in each type of trust.
We explained that a grantor trust is a
trust in which the grantor continues to
be treated as the owner of the trust assets
for income tax purposes even though
ownership of the asset has been transferred
to the trust, and a non-grantor
trust is one in which the grantor gives
up all control of the trust property and
is not an income benefi ciary of the property.
Th ere are, however, certain instances
in which a grantor may want some
attributes of a grantor trust and other
attributes of a non-grantor trust. For
such scenarios, there is actually a hybrid
of the two trust forms referred to as
an intentionally defective grantor trust
(‘IDGT’) which serves this purpose. Th e
idea behind the IDGT is for the property
transferred to the trust to be considered
a completed transfer for estate and
gift tax purposes but not for income tax
For the IDGT to be eff ective, the trust
must be irrevocable, and the grantor
must relinquish any powers that will
prevent transfers to the trust from being
considered completed gift s under the
Internal Revenue Code.
Once property is transferred to the
trust, it is deemed frozen for estate
tax purposes, and any appreciation in
value aft er the transfer is made is not
includable in the grantor’s taxable estate.
Provisions that allow the trust to be
defective from an income tax perspective
(therefore a grantor trust) would
include designating the grantor’s spouse
as trustee and granting the power to
borrow against trust assets.
On the other hand, those provisions
would not prevent a gift to the trust
from being deemed a completed transfer
for estate tax purposes, making this
type of trust a very eff ective estate planning
Since transactions between a grantor
and a grantor trust are “disregarded”
for income tax purposes, there is no
gain or loss recognized on transfers into
these trusts; therefore, the grantor may
use the trust as a vehicle to preserve the
losses or gains of his personal assets and
assets that have been transferred to the
trust in a way that is most advantageous
to the grantor.
One such example of how an IDGT
can be a very eff ective and versatile
planning tool is that the grantor may
“swap” assets that have been transferred
to the trust for assets of equal value.
Th is would give the grantor the ability
to trade assets currently held in the trust
that are highly appreciated with assets
that have appreciated less. By doing this,
the highly appreciated asset is returned
to the grantor’s individual name, and as
long as the grantor does not sell the asset
during his life, there will be a step up in
basis upon his death.
As another planning device, the grantor
can also sell assets to an IDGT in
exchange for a promissory note. Th is is
typically done by having the trust make
a minimal down payment on the asset
and then make the minimum interest
payments required by the IRS with a balloon
payment at the end. Th is enables
the grantor to sell highly depreciated
assets to the trust while preserving the
carryover basis of the asset.
For example, if an asset had a basis
of $3 million dollars and has a current
value of $500,000, the $2,500,000 loss
would be wiped out upon the death of
the grantor if the asset was in the grantor’s
estate at the time of death. However,
if the asset was sold to the trust, the benefi
ciaries would still be able to recognize
that loss when the asset is subsequently
Th is article provides only a cursory
look at some of the various ways in
which an IDGT can be used in estate
and tax planning. It is crucial that one
consult with a seasoned tax and estate
planning professional to determine if
an IDGT is the correct tool for one’s situation.
Ronald A. Fatoullah, Esq. is the founder
of Ronald Fatoullah & Associates,
a law fi rm that concentrates in elder
law, estate planning, Medicaid planning,
guardianships, estate administration,
trusts, wills, and real estate. Joseph
Breningstall, Esq. is an associate attorney
with the fi rm. Th e law fi rm can be
reached at 718-261-1700, 516-466-4422,
or toll-free at 1-877-ELDER-LAW or
1-877-ESTATES. Mr. Fatoullah is also
a partner advisor with Advice Period, a
wealth management fi rm that provides
a continuum of fi nancial and investment
advice for individuals and businesses,
and he can be reached at 424-256-7273.
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