Managing an ILIT’s Grantor Trust Status In Light of IRC Section 677(a)(3)Managing an ILIT’s Grantor Trust Status In Light of IRC Section 677(a)(3)

The transfer of assets by gift, sale or loan to an irrevocable dynasty trust that’s a grantor trust for income tax purposes has become a cornerstone of sophisticated wealth transfer planning.¹ As a grantor trust, even though assets have been transferred out of the taxable estate for gift, estate and generation-skipping transfer (GST) tax purposes and the trust is, in fact, the legal owner of the transferred property, the grantor is still treated as the owner of those assets for income tax purposes. This has important ramifications in that: (1) all items of income, expense and depreciation are reported on the grantor’s income tax return; (2) the sale of appreciated assets by the grantor to the trust doesn’t trigger taxation of gain; and (...