Revocable Grantor Trusts and IDGTs After the Death of the Trustor

The tax treatment of grantor trust assets at the death of the grantor often presents estate planners with specific challenges, particularly if the trustor dies prematurely or unexpectedly. Common techniques utilized in structuring intentionally defective grantor trusts (IDGTs) can result in gain recognition and inclusion of assets in the decedent’s gross estate. Planners must ensure their clients are aware of the potential tax consequences that can occur upon a trustor’s premature death.

The general rule is that a revocable grantor trust becomes an irrevocable trust upon the death of the trustor. In cases where the trustor has transferred assets into a revocable grantor trust, the transfer is disregarded for income tax purposes. Upon the death of the grantor, once the transaction is deemed completed to the irrevocable trust, there is uncertainty in some cases as to whether the trust can take a step-up in basis on the transferred assets, or whether the trust takes a carryover basis from the trustor.

Set up correctly and based on current law, sales or gifts to these trusts can exclude the assets from the grantor’s estate. However, trust powers must be carefully selected and understood in order to avoid an incomplete gift and unintentional inclusion of income in the grantor’s estate.

Listen as our experienced panel of estate planning advisers provides a practical guide to navigating the challenges of defective and grantor trusts after the death of the trustor.