CLARITY ON INCOME TAX REIMBURSEMENT FOR GRANTOR TRUSTS IN NEBRASKA C O U N S E L O R ’ S C O R N E R In modern wealth transfer planning, strategies involving the transfer of assets into irrevocable trusts are commonplace. Many of these irrevocable trusts are referred to as “intentionally defective grantor trusts” (IDGT) and are treated as “grantor trusts” for federal income tax purposes, requiring the grantor to pay all income taxes attributable to such trust despite having no access to the trust’s assets. However, for transfer tax purposes, the IDGT is treated as a separate taxpayer. This difference between income and transfer tax treatment has led the IDGT to be the wealth transfer planning vehicle of choice for many advisors. The taxation of all trust income to the grantor is an extremely powerful wealth transfer planning tool, essentially allowing the grantor to make tax-free gifts to the trust each year of the taxes paid without the use of the grantor’s annual exclusion or lifetime exemption. However, during times of economic hardship or in tax years with an abnormally high tax bill (e.g., such as upon the sale of a closely held business interest at a premium), the income tax imposed on the grantor can present a tremendous cash f low burden. To deal with this issue, many practitioners seek to include a discretionary power allowing an independent trustee to reimburse BY NATE PATTERSON & CRAIG BENSON, KOLEY JESSEN I S S U E 3 , 2 0 2 2 8 nebraska cpas
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