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GRANTOR TRUST ANSWER BOOK - 2024 SEARCHABLE PDF EBOOK EDITION



 

Use this link to buy the webinar and ebook

About the Author

Steven G. Siegel is the president of The Siegel Group, a Morristown, New
Jersey-based national consulting firm specializing in tax consulting, estate
planning and advising family business owners and entrepreneurs. Mr. Siegel holds
a BS from Georgetown University, a JD from Harvard Law School and an LLM in
Taxation from New York University. Steve has lectured extensively throughout the
United States on tax, business and estate planning, and eldercare topics on
behalf of numerous national and state professional organizations as well as
private companies. He has served as an adjunct professor of law at the
University of Alabama Law School Graduate Tax Program, Seton Hall and Rutgers
University law schools. Steve provides consulting services to accountants,
attorneys, financial planners and life insurance professionals to assist them
with the tax, estate and business planning and tax preparation compliance issues
confronting their clients.

Preface

Grantor trusts are everywhere in estate planning, from their use in the most
simple revocable trust of a person looking to avoid probate and not concerned
with income tax or transfer tax planning issues, to their use by the most
sophisticated business or property owner, looking for a way to avoid crushing
transfer taxes. This book is intended to be a resource for a broad range of
professionals, including attorneys, CPAs, financial planners and fiduciaries
that practice in the areas of tax and estate planning, administration and
fiduciary management, as well as for the grantors and beneficiaries of the
trusts they have created—or that have been created for them.

While the grantor trust tax rules have been around for a long time in the
Internal Revenue Code, they deserve a fresh look, as changing tax rates and
recently developed estate planning techniques and opportunities place these
rules in an entirely different context than the context they were originally
enacted to address. Originally enacted as somewhat of a “punitive” measure to
discourage aggressive tax planning, the grantor trust rules have evolved into
offering an opportunity to encourage advantageous income tax and estate
planning.

This book addresses each of the sections of the Internal Revenue Code that
involve grantor trust issues and explains how and why the grantor trust rules
work, and provides a practical guide to understanding and working with these
rules. It also discusses the leading special tax and estate planning techniques
that have grantor trusts at their core, namely Grantor Retained Interest Trusts
(GRATs, GRUTs and GRITs), Personal Residence Trusts and QPRTs, and Intentionally
Defective Grantor Trusts.

If there is a “theme” to this book—it is a recommendation that clients should
not be reluctant to embrace planning, and that all advisors, including
attorneys, accountants, fiduciaries and financial planners should not be timid
in recommending to their clients the planning opportunities and techniques that
best suit their needs. Nothing contained in this book is designed to suggest
anything “outside the lines” of appropriate tax planning. Instead, the message
of the book is that there is so much that can be done “inside the lines” of
appropriate tax planning that clients and their advisors can achieve mutually
rewarding results if they remain open to the planning opportunities the grantor
trust rules offer.

There is also a note of caution to raise. There is substantial discussion to the
effect that tax laws may be changing. Planners should act quickly on behalf of
their clients to address planning before any new provisions may be enacted.
Changing tax laws are typically formed from political compromise. It is
suggested that what we know now and can be addressed now will be grandfathered
if done now, and should be insulated from future

How to Use This Book

The Grantor Trust Answer Book is designed for practitioners who need quick and
authoritative answers to questions concerning the grantor trust rules in the
Internal Revenue Code. This book uses simple, straightforward language. The
question and answer format, with its breadth of coverage, effectively conveys
the complex subject matter of the grantor trust rules. In addition, the book
provides an extensive index. List of Questions. A detailed list of questions
follows the table of contents in front of the book in order to help the reader
locate areas of immediate interest. This list provides both the question number
and the page number on which it appears. A series of subheadings help to group
and organize the questions by topic within each chapter. Question Numbers. The
questions are numbered consecutively within each chapter (e.g., Q 2:1, Q 2:2, Q
2:3).

Contents

List of Questions

Chapter 1 Overview of Grantor Trusts: Principles and Taxation

Chapter 2 Code Section 671—Trust Income, Deductions and Credits Attributable to
Grantors and Others as Substantial Owners

Chapter 3 Code Section 672—Grantor Trust Definitions and Rules

Chapter 4 Code Section 673—Reversionary Interests and the Grantor Trust Rules

Chapter 5 Code Section 674: Power to Control Beneficial Enjoyment and the
Grantor Trust Rules

Chapter 6 Code Section 675: Administrative Powers and the Grantor Trust Rules

Chapter 7 Code Section 676: The Power to Revoke a Trust and the Grantor Trust
Rules

Chapter 8 Code Section 677: Income for the Benefit of the Grantor and the
Grantor Trust Rules

Chapter 9 Code Section 678: Person Other than the Grantor Treated as the
Substantial Owner of the Trust

Chapter 10 Code Section 679: Foreign Trusts Having One or More United States
Beneficiaries

Chapter 11 The Relationship between Grantor Trusts and the Gift and Estate Taxes

Chapter 12 Grantor Trusts: Miscellaneous Critical Planning Issues

Chapter 13 Grantor Retained Interest Trusts: GRATs, GRUTs and GRITs .13,001
Other Planning with GRATS

Chapter 14 Residences, Personal Residence Trusts, Qualified Personal Residence
Trusts

Residences in General

Personal Residence Trusts

Qualified Personal Residence Trusts

Planning with Qualified Personal Residence Trusts

Chapter 15 Intentionally Defective Grantor Trusts1

The Intentionally Defective Grantor Trust: What It Is; How Does It Work; When Is
It Used
Sale of Property to an Intentionally Defective Grantor Trust .

Index

Grantor Trust Answer Book xiii List of Questions

Chapter 1 Overview of Grantor Trusts: Principles and Taxation

Q 1:1 What is a trust and why isone used?

Q 1:2 Who is the “Grantor”?

Q 1:3 Once identified as the grantor of the trust, will the Grantor always be
subject to tax on the trust’s income?

Q 1:4 What is a “Grantor Trust”?

Q 1:5 What are the rights and interests retained by a grantor that require the
trust to be considered a grantor trust?

Q 1:6 Why do we have the grantor trust rules? What is their history?

Q 1:7 What is meant by the term“Clifford Trust”?

Q 1:8 Why are grantor trusts viable in the current planning environment?

Q 1:9 Are the assets included in a grantor trust automatically included in the
grantor’s estate?

Q 1:10 Do the grantor trust rules apply to trusts created to satisfy matrimonial
obligations?

Q 1:11 What happens to the income tax basis in a grantor trust when the grantor
dies?

Q 1:12 How is a grantor trust administered after the grantor’s death?

Q 1:13 Is a grantor trust a permitted shareholder of an S corporation?

Q 1:14 What is the effect of Code Section 2511(c)?

Q 1:15 Do all U.S. States tax Grantor Trusts in the same manner as Federal law?

Q 1:16 Should grantor trusts owning pass through entities (PTEs) be concerned if
elections are made to have the entities pay the state income taxes on their
income?

Chapter 2 Code Section 671—Trust Income, Deductions and Credits Attributable to
Grantors and Others as Substantial Owners

Q 2:1 How does Code Section 671 explain the basic “ground rules” for the
taxation of grantor trusts?

Q 2:2 Who is a grantor of a trust? What is a gratuitous transfer to a trust?

Q 2:3 Do the grantor trust rules apply where a person has created a trust to
satisfy obligations to support a spouse in the context of a divorce?

Q 2:4 What is the relationship between the grantor trust rules and the
assignment of income doctrine?

Q 2:5 Are there areas of taxation where the grantor trust rules of Subpart E are
precluded from applying?

Q 2:6 How do the grantor trust rules addressdistinctions between taxable income
and trust accounting income?

Q 2:7 What are the tax consequences for income, deductions and credits under the
grantor trust rules when a grantor owns a portion of a trust?

Q 2:8 What is the relationship between the grantor trust rules and the pass
through of exclusions and deductions and nonrecognition of income sections of
the Internal Revenue Code?

Q 2:9 What is the required taxable year and method of accounting for a grantor
trust?

Q 2:10 What are the reporting and income taxfiling requirements imposed on a
grantor trust?

Q 2:11 What are the reporting rules for a grantor trust when the grantor dies?

Q 2:12 What is a qualified revocable trust election and what are the reporting
requirements when the election is made?

Q 2:13 How are statutes of limitations addressed when there is a grantor trust?

Q 2:14 How are transfers of property by a grantor to a grantor trust treated for
income tax purposes?

Q 2:15 How are sales of property between the grantor and the grantor trust
treated under the grantortrust rules?

Q 2:16 Does the payment by the grantor of the income tax liability of a grantor
trust constitute a gift by the grantor to the trust beneficiaries?

Q 2:17 What are the reporting requirements for widely held fixed investment
trusts and widely held mortgage trusts?

Chapter 3 Code Section 672—Grantor Trust Definitions and Rules

Q 3:1 What is meant by the term“adverse party”?

Q 3:2 What is meant by the term “related or subordinate party”?

Q 3:3 What is the effect of a power of the grantor that is limited by a
condition precedent?

Q 3:4 How are the powers and interests held by the grantor’s spouse treated
under the grantor trust rules?

Q 3:5 What is the effect on the grantor trust rules and United States taxpayers
when the grantor is a foreign person?
..............................................................................
3008

Chapter 4 Code Section 673—Reversionary Interests and the Grantor Trust Rules

Q 4:1 Does possession of a reversionary interest in a trust make a trust a
grantor trust?

Q 4:2 What is a reversionary interest?

Q 4:3 How is the presence of a five percent interest determined?

Q 4:4 Can the actual health of the grantor be used to vary the results of the
actuarial tables?

Q 4:5 How is the five percent interest tested when the retained interest is
difficult to value actuarially?

Q 4:6 Is there an exception from the general reversionary interest rule for the
death of a lineal descendant who had not attained age 21? .

Q 4:7 What is the effect of the grantor postponing the effective date of the
reversionary interest?

Q 4:8 Does IRC 673 have a relationship with the estate tax reversionary interest
inclusion provisions of IRC 2037?

Q 4:9 Since the current Code Section 673 rules apply to transfers in trust made
after March 1, 1986, what rules are applicable to transfers in trust made on or
before March 1, 1986 under the “old” Section 673 rules?

Q 4:10 What is meant by the term “spousal remainder trust”?

Chapter 5 Code Section 674: Power to Control Beneficial Enjoyment and the
Grantor Trust Rules

Q 5:1 What is the general rule stated by Code Section 674 as to the power to
control beneficial enjoyment of trust property—and are there important
exceptions to the rule?

Q 5:2 Will the power to apply income to the support of a dependent of the
grantor always trigger grantor trust treatment?

Q 5:3 Will the power to affect beneficial enjoyment only after a period of time
elapses always trigger grantor trust treatment?

Q 5:4 Does a power over the beneficial enjoyment of a trust exercisable only by
will automatically trigger grantor trust treatment?

Q 5:5 Does a power to determine the beneficial enjoyment of charitable
beneficiaries automatically trigger the grantor trust rules?

Q 5:6 Does a power to distribute trust principalautomatically trigger the
grantor trust rules?

Q 5:7 Does a power to temporarily withhold income from a beneficiary
automatically trigger grantor trust status?

Q 5:8 Does a power to withhold income during the disability of a beneficiary
automatically trigger grantor trust status?

Q 5:9 Does a power to allocate between income and principal automatically
trigger grantor trust status?

Q 5:10 What is the significance to the grantor trust rules of giving powers to
an independent trustee?

Q 5:11 What is the significance to the grantor trust rules of having a power to
allocate income limited by a standard?

Q 5:12 What is the effect on the grantor trust rules of allowing the grantor to
have the power to remove the trustee?

Q 5:13 What is the effect on the grantor trust rules of the power to add
beneficiaries to the trust?

Chapter 6 Code Section 675: Administrative Powers and the Grantor Trust Rules

Q 6:1 As a general rule, can the possession of administrative powers in a trust
by the grantor cause a trust to be treated as a grantor trust?

Q 6:2 How does the power to deal with trust assets for less than adequate and
full consideration result in grantor trust classification?

Q 6:3 How does the power to borrow trust assets without providing adequate
interest or adequate security result in grantor trust classification?

Q 6:4 Must the grantor be able to borrow the trust funds without providing both
adequate interest and adequate security to invoke Code Section 675(2)?

Q 6:5 How does the actual borrowing of the trust funds by the grantor result in
grantor trust classification?

Q 6:6 Does the general rule of Code Section 675(3) only require grantor trust
status when there is direct borrowing by the grantor from the trust?

Q 6:7 When the grantor borrows from a grantor trust, can the grantor claim an
interest deduction for interest paid to the trust?

Q 6:8 What is meant by the statutory phrase taxing the grantor on a “portion” of
the trust?

Q 6:9 What are the general administrative powers over the trust which, if held
by the grantor, will cause the trust to be treated as a grantor trust?

Q 6:10 What is meant by a power exercisable in a “fiduciary capacity”?

Q 6:11 Is it possible for a person to hold a nonfiduciary power in a trust to
substitute assets of equivalent value and be treated as the grantor of that
trust for income tax purposes, without having the trust property included in his
or her estate?

Q 6:12 Has there been proposed legislation that could severely limit the use of
Code Section 675 powers in grantor Code Section 675: Administrative Powers trust
estate planning?

Q 6:13 Should Extra Caution be Exercised in Using the Power of Substitution?

Chapter 7 Code Section 676: The Power to Revoke a Trust and the Grantor Trust
Rules

Q 7:1 Does the grantor’s power to revoke a trust make the trust a grantor trust?

Q 7:2 Does the grantor’s power to revoke part of a trust require the entire
trust to be treated as owned by the grantor?

Q 7:3 If the grantor’s spouse, but not the grantor, possesses the power to
revoke the trust, and revest title in the grantor, will the grantor still be
treated as a grantor of the trust?

Q 7:4 What is meant by the phrase, “power to revest” title in the grantor?

Q 7:5 How is a power to revoke created?

Q 7:6 Is the power to reacquire trust assets at less than fair market value
treated as a power to revoke the trust?

Q 7:7 Does the possession of a reversionary interest in the grantor constitute a
right to revokethe trust?

Q 7:8 How is a Totten Trust treated under the grantor trust rules?

Q 7:9 Do retained management powers over a trust make the trust revocable?

Q 7:10 Does the grantor’s retained right to borrow from the trust make the trust
revocable?

Q 7:11 Can a grantor’s demand loan to a trust create a grantor trust?

Q 7:12 If a person has a power to revoke a trust, and is treated as a trust
grantor, is the trust property automatically included in that person’s estate
for federal estate tax purposes?

Q 7:13 Should a grantor create a revocable trust if the grantor is intending to
create an intentionally defective grantor trust?

Q 7:14 Does possession of the right to revoke a trust automatically trigger
grantor trust status even if the right is deferred?

Q 7:15 Is a pre-need funeral trust treated as a grantor trust?

Q 7:16 Is the Family Estate Trust a viable tax planning tool?

Chapter 8 Code Section 677: Income for the Benefit of the Grantor and the
Grantor Trust Rules

Q 8:1 Will the grantor be treated as the owner of a trust if the trust income
may be used for thegrantor’s benefit?

Q 8:2 What is the effect for income tax purposes of allowing trust income to be
distributed to the grantor or to the grantor’s spouse, and what is a SLAT?

Q 8:3 What is the effect of trust income being held or accumulated for future
distribution to the grantor?

Code Section 675: Administrative Powers xix Grantor Trust Answer Book List of
Questions

Q 8:4 What rules apply when the grantor sells or transfers property to a trust
in exchange for a private annuity?

Q 8:5 What is the effect of using trust income to pay life insurance premiums on
the life of the grantor or the grantor’s spouse?

Q 8:6 What is the effect of a trust permitting trust income to be used to
discharge the grantor’s support obligations?

Q 8:7 How is the grantor’s support obligation determined?

Q 8:8 What is the effect of a trust permitting trust income to be used to
discharge indebtedness of the grantor?

Q 8:9 What is the effect of a grantor relinquishing the powers that cause
grantor trust status to apply?

Chapter 9 Code Section 678: Person Other than the Grantor Treated as the
Substantial Owner of the Trust

Q 9:1 Is it possible for a person other than the grantor to be treated as the
owner of a trust?

Q 9:2 Can a person other than the grantor be treated as the owner of a trust
that can be used to satisfy the legal obligations of that person?

Q 9:3 How is a minor treated under Code Section 678 if the minor has a power of
withdrawal over a trust?

Q 9:4 If a person disclaims a power otherwise described in Code Section 678(a),
will the person continue to be treated as the owner of the trust?

Q 9:5 If a person holds a “five and five power,” will that result in the person
being treated as the owner of a portion of the trust?

Q 9:6 If a person holds a “Crummey Power” in a trust, will that result in the
person being treated as the owner of a portion of the trust?

Q 9:7 What should be done in a case where both the grantor of a trust and a
power holder over the trust appear to be multiple owners of the same trust?

Code Section 675: Administrative Powers

Q 9:8 Under what circumstances does a beneficiarybecome the trust grantor?

Q 9:9 What is meant by a “beneficiary-controlled trust,”and how can this trust
be used in planning?

Q 9:10 What are the rules when one grantor trust owns another trust?

Q 9:11 Does the inclusion of a HEMS (health, education, maintenance and support)
standard in a trust avoid a finding of Code Section 678 status?

Chapter 10 Code Section 679: Foreign Trusts Having One or More United States
Beneficiaries

Q 10:1 What is the purpose and general rule of Code Section 679 regarding
transfers to foreign trusts?

Q 10:2 Are there any transfers to a foreign trust that are excepted from the
general rule?

Q 10:3 How is the term a “United States person” defined for purposes of these
rules?

Q 10:4 When does a trust have a United States beneficiary?

Q 10:5 How are direct and indirect transfers to a foreign trust distinguished?

Q 10:6 What rules are applicable in the case of a foreign grantor who later
becomes a United States resident citizen?

Q 10:7 What is meant by an outbound migration of a domestic trust?

Q 10:8 What are the reporting requirements for U.S. persons treated as owners of
foreign trusts?

Q 10:9 Is it possible to plan to avoid having a trust be made subject to Code
Section 679?

Chapter 11 The Relationship between Grantor Trusts and the Gift and Estate Taxes

Q 11:1 Will a transfer by a grantor to a grantor trust be subject to gift tax? .

Q 11:2 Will the grantor’s payment of income tax on the trust’s income constitute
a gift to the beneficiaries of the trust?

Q 11:3 Will the death of a grantor of a grantor trust require the inclusion of
the trust property in the grantor’s estate for estate tax purposes?

Q 11:4 What is the effect for estate tax purposes of allowing the property in a
grantor trust to be used to satisfy the obligations of the grantor?

Q 11:5 What other rules apply to cause the inclusion of the property of a
grantor trust in thegrantor’s estate?

Q 11:6 Will administrative and management powers over a trust retained by the
grantor cause inclusion of the trust property in the grantor’s estate?

Q 11:7 Will a spouse who consents to a gift to a grantor trust have an estate
tax inclusion issue?

Code Section 675: Administrative Powers Grantor Trust Answer Book List of
Questions xxi

Q 11:8 How are reciprocal grantor trusts treated for estate tax purposes?

Q 11:9 What Is the Relationship Between an “Incomplete Non- Grantor Trust” (ING
Trust) and the Grantor Trust Rules?

Chapter 12 Grantor Trusts: Miscellaneous Critical Planning Issues

Q 12:1 What is a revocable trust, and how is it used in estate planning?

Q 12:2 What is the relationship between grantor trusts and S corporations?

Q 12:3 What is a grantor charitable lead trust, and how is it taxed? .

Q 12:4 What is an intentionally defective charitable lead trust?

Q 12:5 What is meant by “toggling” grantor trust powers?

Q 12:6 What is the relationship between grantor trusts and the passive activity
rules?

Q 12:7 What is the relationship between grantor trusts and the at risk rules?

Q 12:8 Can the terms of a grantor trust be changed by decanting?

Q 12:9 What grantor trust issues will the IRS decline to address in advance
rulings?

Q 12:10 Can an irrevocable trust be treated as a grantor trust?

Q 12:11 Are grantor trusts subject to the net investment income tax?

Q 12:12 How are grantor trusts treated in the context of a divorce?

Q 12:13 Can a grantor trust hold an IRA?

Q 12:14 What is the relationship between grantor trusts and the bankruptcy and
insolvency exclusions for cancellation of debt income?

Q 12:15 Is a conversion of a non-grantor trust to a grantor trust a taxable
transfer of property?

Q 12:16 What is a joint revocable trust? – Is it a good planning idea?

Q 12:17 Are partnership profits payable to a grantor trust subject to
selfemployment tax?

Q 12:18 If a Trust is a Non-Grantor Trust, How is it Taxed? Code Section 675:
Administrative Powers

Chapter 13 Grantor Retained Interest Trusts: GRATs, GRUTs and GRITs

Q 13:1 What are the general rules that apply when a person transfers property to
a trust for the benefit of a family member and retains an interest in that
trust? .... 13,001

Q 13:2 What is meant by the reference in Code Section 2702 to a “member of the
family”?

Q 13:3 What is meant by the reference in Code Section 2702 to a “transfer in
trust”? .

Q 13:4 What is meant by the reference in Code Section 2702 to a “retained
interest”?

Q 13:5 How can the general rules of Code Section 2702 attributing a zero value
to a retained interest be avoided?

Q 13:6 What is meant by a “qualified interest”?

Q 13:7 Can the grantor of a trust containing a qualified annuity or unitrust
interest act as trustee ofthat trust?

Q 13:8 What is a GRAT?

Q 13:9 What is a GRUT?

Q 13:10 How does a GRAT work?

Q 13:11 How does a GRUT work?

Q 13:12 How are GRATs and GRUTs viewed as tax planning techniques?

Q 13:13 Are transfers to the GRAT and GRUT eligible for the present interest
gift tax annual exclusion?

Q 13:14 Are there differences between the GRAT and the GRUT that make one or the
other a more attractive estate planning vehicle?

Q 13:15 What are the income tax issues that arise in connection with a GRAT?

Q 13:16 What are the gift tax issues that arise in connection with a GRAT?

Q 13:17 What are the estate tax issues that arise in connection with a GRAT?

Q 13:18 If the GRAT is successful, and the grantor survives the retained
interest term, what is the basis of the trust property in the hands of the
remainder beneficiaries? What is their basis if the grantor does not survive the
retained interest term?

Q 13:19 What are the generation-skipping transfer tax issuesthat arise in
connection with a GRAT?

Other Planning with GRATS

Q 13:20 Is the GRAT a viable estateplanning tool?

Q 13:21 Can a GRAT be funded with SCorporation stock?

Q 13:22 If the GRAT is funded with S Corporation shares, can valuation discounts
be used to reduce the value of the gift to the trust?

Code Section 675: Administrative Powers Grantor Trust Answer Book List of
Questions xxiii

Q 13:23 Can the valuation discount planning described in

Q 13:22 in connection with S Corporation interests be used with other ownership
interests?

Q 13:24 What is meant by planning with“graduated GRATs”?

Q 13:25 Are there advantages and disadvantages in usingshortterm GRATs in
planning?

Q 13:26 Are there advantages and disadvantages to usinglongterm GRATs in
planning?

Q 13:27 Can a note be used to satisfy the required annuity payment in a GRAT?

Q 13:28 Can the grantor of a GRAT loan funds to the GRAT which can, in turn, be
used to satisfy the required annuity payment? Can the GRAT trustee borrow funds
from a bank or other third parties for this purpose?

Q 13:29 Can the grantor of a GRAT give his or her spouse a succeeding annuity
interest in the trust to lengthen the retained interest term of the GRAT and
reduce the amount of the gift of the remainder interest (a revocable spousal
annuity)?

Q 13:30 What is meant by a “zeroed-out” GRAT? and what is the significance of
the Walton case?

Q 13:31 What planning techniques are recommended with zeroed-out GRATs after the
Walton case?

Q 13:32 Can a GRAT be designed to qualify for the federal estate tax marital
deduction if the grantor dies before the end of the retained interest term?

Q 13:33 What are the key points to remember if the grantor wants to create a
valid “Walton zeroed-out GRAT”?

Q 13:34 How should a GRAT be funded—with a single asset or with a diversified
portfolio of assets?

Q 13:35 Are there any cautionary notes to be raised in connection with
suggesting the use in planning of zeroed-out GRATs?

Q 13:36 Is it possible to illustrate the relationship between alternative Code
Section 7520 rates and the duration of a GRAT to see the size of the interest
that must be retained by the grantor in order to achieve a zeroedout GRAT?

Code Section 675: Administrative Powers

Q 13:37 Is there any difference in the GRAT calculation and performance if
interest rates are higher or lower?

Q 13:38 What is meant by the 99-year GRAT strategy?

Q 13:39 Given the enactment of Chapter 14 of the Internal Revenue Code and the
requirements of Code Section 2702 referring to “qualified interests,” is there
any remaining viability for the non-statutory GRIT(Grantor Retained Interest
Trust)?

Q 13:40 What is a Grantor Retained Interest Trust (GRIT) and how does it work?

Q 13:41 In summary, when should the GRAT planningtechnique be recommended?

Q 13:42 Will the IRS proposed regulations under Code Section 2704 have an impact
on GRATs?

Q 13:43 When Should Contributions to a GRAT be Valued?

Q 13:44 Have additional GRAT strategies been suggested by creative and
thoughtful practitioners?

Chapter 14 Residences, Personal Residence Trusts, Qualified Personal Residence
Trusts Residences in General

Q 14:1 Can a grantor trust hold apersonal residence?

Q 14:2 If a grantor trust holds a personal residence, who can claim the property
tax and mortgageinterest deductions?

Q 14:3 If a grantor trust holds the principal residence of the grantor, and the
residence is sold, is the exclusion from capital gains taxation available?

Personal Residence Trusts

Q 14:4 Code Section 2702 provides that for gift tax valuation purposes, when
transfers are made to trusts with a retained interest, the value of the retained
interest is zero unless it is a “qualified interest.” Does this rule apply in
the case of transfers in trust of a personal residence?

Q 14:5 If outside the Code Section 2702 valuation rules, how should a transfer
by gift of a personal residence to a retained interest trust be valued?

Q 14:6 Can a Personal Residence Trust be treated as a grantor trust?

Q 14:7 What are the tax planning advantages of a Personal Residence Trust?

Q 14:8 What property is considered to qualify as a “personal residence”?

Q 14:9 What living arrangements satisfy the requirements of being a “personal
residence”? .

Q 14:10 Is there any limit on the number of residences a person may place into
personal residence trusts?

Grantor Trust Answer Book List of Questions xxv Qualified Personal Residence
Trusts

Q 14:11 The regulations refer to a “personal residence trust” and a “qualified
personal residence trust.” Arethere differences between the two trusts?

Q 14:12 Given the differences between the personal residence trust and the QPRT,
is one more widely used in tax planning activities?

Q 14:13 How are appurtenant structures and adjacentland addressed within the
QPRT rules?

Q 14:14 Can the term holder’s personal property be included as part of the
property that may be transferred to a personal residence trust?

Q 14:15 Is there any prohibition on transferring property subject to a mortgage
to a Qualified Personal Residence Trust?

Q 14:16 Can spouses with an interest in the same residence fund a QPRT with
their interests in that residence?

Q 14:17 Are there any requirements imposed by law on a QPRT that are essential
to assure its qualification as a valid QPRT?

Q 14:18 Since so many of the requirements for a QPRT discussed above threaten
the disqualification of the trust, what happens if a trust ceases to qualify as
a QPRT?

Q 14:19 How is the Qualified Personal Residence Trusttreated for income tax
purposes?

Q 14:20 How is the Qualified Personal Residence Trusttreated for gift tax
purposes?

Q 14:21 How is the Qualified Personal Residence Trusttreated for estate tax
purposes?

Q 14:22 My client is interested in the concept of the QPRT, but is concerned
about his life expectancy. Is there any way he can “hedge” this issue?

Q 14:23 How is the Qualified Personal Residence Trusttreated for
generation-skipping transfer tax purposes?

Planning with Qualified Personal Residence Trusts

Q 14:24 Who can be the trustee of a QPRT—can it be the grantor?

Q 14:25 From a planning perspective, are multiple QPRTs desirable?

Q 14:26 After the retained interest term ends, can the grantor still use the
residential property?

Q 14:27 Can the grantor have the right to repurchase the residence?

Q 14:28 Must the residence pass outright to the remainder beneficiaries at the
end of the retained interest term? 14,038

Q 14:29 Can the grantor name his or her spouse as the remainder beneficiary of a
QPRT to defer anypossible transfer tax liability at the first death?

Q 14:30 Can the grantor name an irrevocable life insurance trust as the
remainder beneficiary of the QPRT?

Q 14:31 May the grantor retain a reversionary interest in the QPRT in the event
of his or her death during the retained interest term of the trust?

Q 14:32 Is failure to comply with all of the QPRT requirements a fatal error, or
can the trust be reformed?

Q 14:33 Are there any asset protection advantages when a QPRT is used?

Q 14:34 Are there any state law issues that should be considered when creating a
QPRT?

Q 14:35 Is there a standard form of a QPRT that the IRS will approve without
requiring a private letter ruling request?

Q 14:36 Does the Code Section 7520 rate in effect for the month the QPRT is
created make a difference in determining the QPRT calculation of the retained
andremainder interest valuations?

Q 14:37 How can a client be shown the advantage of using the QPRT trust as
compared to doing no planning with a personal residence?

Q 14:38 If a client is interested in utilizing the QPRT technique, what are the
steps to consider so as to make certain the QPRT is done correctly?

Q 14:39 What can be done if the QPRT term ends, and the grantor does not want to
or cannot afford to pay rent or move out?

Q 14:40 What is a split-purchase QPRT, and does it offer planning advantages?

Q 14:41 What is a QPRT Remainder Sale Technique, and does it offer planning
advantages?

Chapter 15 Intentionally Defective Grantor Trusts The Intentionally Defective
Grantor Trust: What It Is; How Does It Work; When Is It Used

Q 15:1 What is an Intentionally Defective Grantor Trust?

Q 15:2 When is an Intentionally Defective Grantor Trust Used?

Grantor Trust Answer Book List of Questions xxvii

Q 15:3 In broad overview, how does an Intentionally Defective Grantor Trust
work?

Q 15:4 How does an Intentionally Defective Grantor Trust work within the grantor
trust rules of the Internal Revenue Code?

Q 15:5 How can a grantor create an Intentionally Defective Grantor Trust without
causing the trust property to be included in the grantor’s estate? .

Q 15:6 Is the retained power to use trust income to pay life insurance premiums
on the grantor’s life a good power to use in connection with an Intentionally
Defective Grantor Trust?

Q 15:7 Is the power to allow a non-adverse trustee to add beneficiaries to the
trust a good power to use in connection with an Intentionally Defective Grantor
Trust?

Q 15:8 Is the power to pay trust income to the spouse of the grantor a good
power to use in connection with an Intentionally Defective Grantor Trust?

Q 15:9 Is the power to pay trust income to the grantor a good power to use in
connection with an Intentionally Defective Grantor Trust?

Q 15:10 Are certain retained administrative powers good powers to use in
connection with an Intentionally Defective Grantor Trust?

Q 15:11 Are certain retained administrative powers not good powers to use in
connection with an Intentionally Defective Grantor Trust?

Q 15:12 Should the grantor be a beneficiary of an Intentionally Defective
Grantor Trust?

Q 15:13 Should the grantor be a trustee of an Intentionally Defective Grantor
Trust?

Q 15:14 When the grantor pays the income tax on the income of an Intentionally
Defective Grantor Trust, does the IRS argue that a gift is being made by the
grantor to the trust beneficiaries?

Q 15:15 How does the grantor’s paying the income taxes on the income of an
Intentionally Defective Grantor Trust provide a tax benefit to thetrust
beneficiaries?

Q 15:16 Can S CorpCoordaetSioecntiosnh6a7r5e: As dbmeinuissteradtivtoe
Pfouwnerds an Intentionally Defective Grantor Trust?

Q 15:17 Can an irrevocable life insurance trust be structured as an
Intentionally Defective Grantor Trust?

xxviii Grantor Trust Answer Book Sale of Property to an Intentionally Defective
Grantor Trust

Q 15:18 How is a sale of property to an Intentionally Defective Grantor Trust
used in tax andestate planning?

Q 15:19 When selling property to an Intentionally Defective Grantor Trust, how
should the trust be created?

Q 15:20 When selling property to an Intentionally Defective Grantor Trust, how
should the trust be funded initially?

Q 15:21 Can the trust beneficiaries provide a guarantee to the grantor in lieu
of or in addition to the grantor’s funding contributions to satisfy the required
equity interest in the trust?

Q 15:22 What should the grantor consider in structuring an installment sale of
property to an Intentionally Defective Grantor Trust?

Q 15:23 How should the grantor structure the installment note to be used in the
sale of property to an Intentionally Defective Grantor Trust?

Q 15:24 What are the income tax consequences to the trust grantor when a sale to
an Intentionally Defective Grantor Trust is used? .

Q 15:25 What are the income tax consequences to the trust grantor or the estate
of the trust grantor if the grantor dies with an unsatisfied installment note
still outstanding?

Q 15:26 What is the gift tax treatment of the trust grantor when a sale to an
Intentionally Defective Grantor Trustis made?

Q 15:27 Should the special valuation gift tax rules found in Code Section 2702
apply to a sale to an Intentionally Defective Grantor Trust?

Q 15:28 What are the estate tax consequences to the trust grantor when a sale to
an Intentionally Defective Grantor Trust is made?

Q 15:29 Can a Self-Cancelling Installment Note be used in the context of an
Intentionally Defective Grantor Trustto avoid inclusion of the note balance in
the estate of a deceased grantor?

Q 15:30 Can a Private Annuity be used in the context of an Intentionally
Defective Grantor Trust to avoid inclusion of the note balance in the estate of
a deceased grantor?

Q 15:31 Once established, can the interest rate used in a sale to an
Intentionally Defective Grantor Trust be refinanced?

Q 15:32 What are the generation-skipping transfer tax consequences to the trust
grantor when a sale to an Intentionally Defective Grantor Trust is made?

Q 15:33 Is there a section of the Internal Revenue Code that specifically
addresses and approves of the use of the Intentionally Defective Grantor Trust?

Q 15:34 Are there any decided court cases which address specifically the issues
raised by an Intentionally Defective Grantor Trust?

Q 15:35 How does the IRS learn about the installment sale to the Intentionally
Defective Grantor Trust transaction?

Q 15:36 How does the installment sale to an Intentionally Defective Grantor
Trust compare as a tax planning technique with a transfer of assets to a GRAT?

Q 15:37 Is the defective grantor trust useful for planning in conjunction with
the portability rules?

Q 15:38 What has been proposed to defeat theintentionally defective grantor
trust technique for grantor trusts?

Q 15:39 If ever effective, will the IRS proposed regulations under Code Section
2704 have an impact on intentionally defective grantor trusts?

Q 15:40 Does an IDGT always end when the grantor dies?

Q 15:41 Has the IRS changed its position that modifying a grantor trust to add a
tax reimbursement clause does not constitute a taxable gift by the trust
beneficiaries to the grantor?



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