Grantor as Trustee of Irrevocable Trust

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Query: Should the grantor serve as trustee of an irrevocable trust created and funded by the grantor?

Response: When a grantor serves as trustee of an irrevocable trust created and funded by the grantor, it is important to make sure that the trust is structured and administered carefully to avoid causing estate inclusion for the grantor. Although a grantor may be a trustee without per se causing estate tax inclusion, the cases and rulings are factual and the wrong combination of certain powers will likely trigger estate inclusion under IRC §§2036, 2038 and/or 2042. The grantor-insured should never be a trustee of his/her own ILIT.

NOTES:

PLR 200123024 states that the grantor may act as trustee of an ILIT and nevertheless avoid estate tax inclusion, so long as distributions are limited to an ascertainable standard, citing Rev. Rul. 73-143 as support.

Rev. Rul. 73-143, 1973-1 CB 407 held that there would be no estate inclusion where grantor, as trustee, was limited to an ascertainable standard in making distributions to the trust's child-beneficiary.

Regs. §20.2042-1(c)(4) provides that a decedent is considered to have an incident of ownership in a policy held in trust if under the terms of the policy the decedent (either alone or in conjunction with another person) has the power (as trustee) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust and that §§2036 and 2038 may also apply.

Rev. Rul. 84-179 held that an insured decedent who transferred all incidents of ownership in a policy to another person, who in an unrelated transaction transferred powers over the policy in trust to the decedent, will not be considered to possess incidents of ownership in the policy for purposes of §2042(2), provided that the decedent did not furnish consideration for maintaining the policy and could not exercise the powers for personal benefit. The result is the same where the decedent, as trustee, purchased the policy with trust assets, did not contribute assets to the trust or maintain the policy with personal assets, and could not exercise the powers for personal benefit.

Contributed by WealthCounsel member and Editorial Oversight Board member Dan Capobianco.
WealthCounsel.com